Company Reports

Digital Realty posted eye-popping booking and re-leasing spreads during the first quarter, but the heightened levels don’t reflect new norms or change our outlook. Management said that customers’ artificial intelligence needs are behind this quarter’s strength, and we continue to believe the AI phenomenon puts Digital Realty in a great position. However, we are always cautious not to get too high or low in response to notoriously choppy booking results, and even if there were continual demand for much higher bookings, Digital Realty wouldn’t have the capacity to meet it. Our forecast already reflects the very good position we believe Digital Realty is in, and we’re maintaining our $135 fair value estimate.

Digital Realty has transformed its business from one that merely provided large companies vast amounts of space and power (a typical wholesale data center that houses few tenants) to one that can offer customers of all sizes the full spectrum of space, power, and connection needs (historically called a co-location data center that has space for many tenants). This positions it well to benefit from three trends that we expect to continue growing: creation and use of data, which is only exacerbated by artificial intelligence; the need for that data to be connected; and reliance on cloud providers.

Digital Realty’s fourth-quarter 2023 result was mediocre considering the very strong demand environment we believe premier data center providers like Digital Realty are in. Renewal pricing remained strong, but bookings were modest and sales stagnant. Management’s 2024 sales outlook was also disappointing, but it’s possible that is misleading as numerous puts and takes, which aren’t indicative of momentum in the firm’s core rental and interconnection revenue, are at play. More broadly, the trajectory of Digital Realty’s financial performance continues to disappoint us, considering the strong position we believe it is in and the firm’s constant financial maneuvers make it difficult for investors to get a true sense of what’s under the hood. We’re maintaining our $135 fair value estimate and think the stock is fairly valued.

Digital Realty is still transitioning its data center portfolio to focus more on its highly connected campuses that can provide all the options customers want in an increasingly data-centric and connected world, which will be even more critical if and when artificial intelligence, or AI, becomes more widely used. The firm continues to see very strong demand and pricing, and it is selling data centers that are not strategic or connected to campuses. Sales growth remains strong, and we expect profits will follow as the transition to the higher-quality portfolio continues. Nothing disclosed in the quarter leads us to adjust our forecast, and we’re maintaining our $135 fair value estimate.

Digital Realty has transformed its business from one that merely provided large companies vast amounts of space and power (a typical wholesale data center that houses few tenants) to one that can offer customers of all sizes the full spectrum of space, power, and connection needs (historically called a co-location data center that has space for many tenants). We think this evolution—largely through acquisitions that focused on network-dense data centers—was critical for success in a modern environment where enterprises rely more on third-party cloud providers, and the constant use of data makes quick and easy access vital. With a sizable presence across nearly every continent, Digital also offers more value for multinational companies that want a fluid solution across their data center footprint. Along with Equinix, we think these qualities make Digital Realty one of only two data center providers that can offer this breadth and set itself apart from the rest of the pack in an industry with secular tailwinds stemming from the creation and use of more and more data.

Digital Realty had a solid though unspectacular quarter of new bookings across all customer types and geographies, which we expect to be typical given we see no end in sight to the growing reliance all entities have on data and connectivity. The most impressive figure this quarter was the significant pricing growth on renewal leases, and management expects the re-leasing spreads to stay elevated throughout the year, which will bode well for sales growth beyond 2023. With little surprising in the quarter, we are maintaining our $135 fair value estimate and still think the stock is mildly undervalued.

Digital Realty has transformed its business from one that merely provided large companies vast amounts of space and power (a typical wholesale data center that houses few tenants) to one that can offer customers of all sizes the full spectrum of space, power, and connection needs (historically called a co-location data center that has space for many tenants). We think this evolution—largely through acquisitions that focused on network-dense data centers—was critical for success in a modern environment where enterprises rely more on third-party cloud providers, and the constant use of data makes quick and easy access vital. With a sizable presence across nearly every continent, Digital also offers more value for multinational companies that want a fluid solution across their data center footprint. Along with Equinix, we think these qualities make Digital Realty one of only two data center providers that can offer this breadth and set itself apart from the rest of the pack in an industry with secular tailwinds stemming from the creation and use of more and more data.

Digital Realty had a good first quarter. Overall leasing was down, but leasing is often choppy, so we wouldn’t overemphasize a single quarter’s result. More important to us, pricing was the strongest in years, and Digital’s smaller co-location and interconnectivity deployments are currently the strongest parts of its business. We think those co-location and interconnection leases are more profitable and contribute to a data center's competitive advantages, supporting our rationale for a positive network effect moat trend rating for this narrow-moat firm. We are raising our fair value estimate to $135 per share from $133 and believe the current stock price provides a good entry point.

Digital Realty has transformed its business from one that merely provided large companies vast amounts of space and power (a typical wholesale data center that houses few tenants) to one that can offer customers of all sizes the full spectrum of space, power, and connection needs (historically called a co-location data center that has space for many tenants). We think this evolution—largely through acquisitions that focused on network-dense data centers—was critical for success in a modern environment where enterprises rely more on third-party cloud providers, and the constant use of data makes quick and easy access vital. With a sizable presence across nearly every continent, Digital also offers more value for multinational companies that want a fluid solution across their data center footprint. Along with Equinix, we think these qualities make Digital Realty one of only two data center providers that can offer this breadth and set itself apart from the rest of the pack in an industry with secular tailwinds stemming from the creation and use of more and more data.

Digital Realty’s fourth-quarter revenue and adjusted EBITDA slightly beat FactSet consensus estimates, but multiple moving parts that cloud both metrics result in them meaning little. More importantly, we see very positive trends in Digital’s business and the transition it has made from a wholesale data center provider to one that can meet colocation and interconnection needs. We think this bodes very well for the firm’s long-term prospects, but in the near term, margins will be under significant pressure. We’re maintaining our $133 fair value estimate and think the stock is attractive.

Digital Realty has transformed its business from one that merely provided large companies vast amounts of space and power (a typical wholesale data center that houses few tenants) to one that can offer customers of all sizes the full spectrum of space, power, and connection needs (historically called a colocation data center that has space for many tenants). We think this evolution—largely through acquisitions that focused on network-dense data centers—was critical for success in a modern environment where enterprises rely more on third-party cloud providers, and the constant use of data makes quick and easy access vital. With a sizable presence across nearly every continent, Digital also offers more value for multinational companies that want a fluid solution across their data center footprint. Along with Equinix, we think these qualities make Digital Realty one of only two data center providers that can offer this breadth and set itself apart from the rest of the pack in an industry with secular tailwinds stemming from the creation and use of more and more data.

Digital Realty’s underlying business showed little effect from the skittish economic environment in the third quarter, and the firm’s full-year outlook was little changed. The minimal drop to the midpoints of some guidance metrics was mostly due to currency and interest rate impacts. However, the firm is preparing for a tougher environment than it has experienced in the recent past, with an assumption that capital won’t be so easily accessible. Acquisitions and speculative building may have to take a back seat, so growth opportunities may not be as prevalent in the near or medium term. We believe this rationalization of spending could be a good thing, and we are not making material changes to our model, which doesn’t build in speculative acquisitions or dispositions. We are maintaining our $133 fair value estimate and believe the stock is attractive at current levels.

Digital Realty has transformed its business from one that merely provided large companies vast amounts of space and power (a typical wholesale data center) to one that can offer customers of all sizes the full spectrum of space, power, and connection needs. With a sizable presence across nearly every continent, it is primed to accommodate the needs of global enterprises that want a fluid solution across their data center footprint. Along with Equinix, we think this makes Digital Realty one of only two data center providers that can offer this breadth and set itself apart from the pack.

Digital Realty has transformed its business from one that merely provided large companies vast amounts of space and power (a typical wholesale data center) to one that can offer customers of all sizes the full spectrum of space, power, and connection needs. With a sizable presence across nearly every continent, it is primed to accommodate the needs of global enterprises that want a fluid solution across their data center footprint. Along with Equinix, we think this makes Digital Realty one of only two data center providers that can offer this breadth and set itself apart from the pack.

Digital Realty has transformed its business from one that merely provided large companies vast amounts of space and power (a typical wholesale data center) to one that can offer customers of all sizes the full spectrum of space, power, and connection needs. With a sizable presence across nearly every continent, it is primed to accommodate the needs of global enterprises that want a fluid solution across their data center footprint. Along with Equinix, we think this makes Digital Realty one of only two data center providers that can offer this breadth and set itself apart from the pack.

Digital Realty had a decent second quarter that was dampened by the strong U.S. dollar. Bookings were solid but unspectacular. Pricing power was apparent after a long stretch of underwhelming renewal pricing. Currency headwinds prompted a slight reduction in the firm’s full-year outlook, but we think it remains well-positioned long-term. It is one of only two firms, along with Equinix, that can provide a worldwide data center presence with robust connectivity options, and we expect secular trends toward digitization and connectivity will keep those qualities in demand. With nothing in the quarter leading us to alter our forecast, we are maintaining our $133 fair value estimate.

Digital Realty’s first-quarter results were sufficient to keep the firm on pace for its full-year guidance, which it reiterated across all major metrics, but there was noise related to currency headwinds, pass-through power costs, and asset dispositions. However, underneath Digital put up another fantastic quarter of bookings and saw renewal pricing turn a corner after being under pressure for the past several years. We believe the transformation Digital has made with its data center portfolio over the last five years, becoming much more network dense and global, will keep this momentum going. While our new fair value estimate of $133, up $3, implies the stock is modestly overvalued, we think it’s the most compelling firm in the data center sector.

Digital Realty has transformed its business from one that merely provided large companies vast amounts of space and power (a typical wholesale data center) to one that can offer customers of all sizes the full spectrum of space, power, and connection needs. With a sizable presence across nearly every continent, it is primed to accommodate the needs of global enterprises that want a fluid solution across their data center footprint. Along with Equinix, we think this makes Digital Realty one of only two data center providers that can offer this breadth and set itself apart from the pack.

We’re excited about Digital Realty’s transformation into a full-menu data center company with properties across the globe, the ability to meet customers' capacity needs no matter how big or small, and a greater focus on interconnection. Digital’s most recent move toward that vision is its agreement to acquire a majority stake in Teraco, a premier African data center company. Digital's bookings have consistently been accelerating, showing the value in its portfolio and overall strategy. However, continued weakness in renewal pricing and margin pressure have been headwinds to sales and profit growth. We’re maintaining our $130 fair value estimate, leaving the stock mildly overvalued, in our view.

Digital Realty has transformed its business from one that merely provided large companies vast amounts of space and power (a typical wholesale data center) to one that can offer customers of all sizes the full spectrum of space, power, and connection needs. With a sizable presence across nearly every continent, it is primed to accommodate the needs of global enterprises that want a fluid solution across their data center footprint. Along with Equinix, we think this makes Digital Realty one of only two data center providers that can offer this breadth and set itself apart from the pack.