• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / U.S. Equity

Data Center Stocks Are Worth a Look as Cloud Spending Keeps Growing

While data center REITs have bounced their early-2018 lows, favorable long-term trends could let them add to their gains.
By ERIC JHONSA
Aug 13, 2018 | 04:53 PM EDT
Stocks quotes in this article: EQIX, DLR, CONE, COR

Though a lot of the easy money has probably been made here, the long-term risk/reward still looks good for data center REITs.

As readers may know, a REIT, or real estate investment trust, doesn't pay taxes at the corporate level. In return, they're required (among other things) to obtain at least 75% of their gross income from real estate, and to pay out at least 90% of their taxable income via dividends, which shareholders pay taxes on as they would other dividends.

Data center REITs such as Equinix (EQIX) , Digital Realty Trust (DLR) , CyrusOne (CONE) and CoreSite Realty (COR) derive revenue in part by offering colocation services to enterprises and service providers, through which clients are able to install servers and other hardware at data centers owned by the REITs. This can either be done on a retail basis, which involves supporting multiple clients through a single data center, or on a wholesale basis, which involves leasing out an entire data center to a single client.

The companies also provide interconnection services that allow clients to connect directly to the networks of third parties (carriers, cloud service providers, etc.) that also have a presence at a data center owner's facilities. For a larger player such as Equinix, there's a network effect at work here: The more clients and data centers it has, the more opportunities it has to sell interconnection services to individual clients.

Naturally, a cloud capital spending boom has been providing a lift to the top and bottom lines of data center REIT owners. With the qualifiers that such spending can fluctuate and that similar growth can't be expected in future years, real estate services firm CBRE estimates spending on North American data center construction grew to $20 billion last year from just $7.7 billion in 2016 and $5.7 billion in 2015.

Both consumer video growth and enterprise cloud adoption are playing major roles in growing the infrastructure needs of tech giants -- needs that are being addressed both by directly building new data centers and partnering with third-party facilities owners. And with regards to enterprise cloud usage, the fact that many companies -- due to security concerns, data regulations and/or performance needs -- want cloud services provided from a nearby data center is contributing to an international data center building spree.

Equinix is aiming for 8% to 10% revenue growth over the next few years. Source: Equinix.

The REITs are seeing more subdued revenue growth among traditional enterprise clients; the fact that many of them are choosing to pare back their own data center footprints as their public cloud usage grows will remain a headwind. However, adoption of hybrid clouds that involve linking a company's own infrastructure with public cloud platforms will act as a boon for interconnection service demand. And the same factors that are leading cloud giants to grow their international data center footprints are also compelling many traditional enterprises to do so.

Overall, data center REITs are well-positioned to see moderate revenue and cash-flow growth in the coming years as global demand for data center colocation space and connectivity services keeps trending higher. And the predictability of the REITs' businesses, with their large recurring revenue streams from contracts inked with major enterprise and service provider clients, arguably merits a valuation premium.

All things considered, valuations for data center REITs still look mostly reasonable. However, with the group having rallied in recent months, investors might want to wait for a pullback before jumping in. Here's a quick overview of publicly-traded data center REITs:

Equinix

Equinix has a $35.1 billion market cap and $10.4 billion in net debt. Shares are valued at 19 times the company's expected 2019 adjusted funds from operations (AFFO). The dividend yield is 2.1%.

Digital Realty Trust

Digital Realty has a $25.1 billion market cap and $9.3 billion in net debt. Shares are valued at 18 times expected 2019 AFFO. The dividend yield is 3.3%.

CyrusOne

CyrusOne has a $6.4 billion market cap and $2.1 billion in net debt. Shares are valued at 18 times expected 2019 AFFO. The dividend yield is 2.8%.

CoreSite Realty

CoreSite has a $3.9 billion market cap and $1 billion in net debt. Shares are valued at 22 times expected 2019 AFFO. The dividend yield is 3.6%.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.
TAGS: Investing | U.S. Equity

More from U.S. Equity

Stock Market Continues to Defy Conventional Wisdom

James "Rev Shark" DePorre
Jan 22, 2021 5:04 PM EST

Concerns about the action being overheated remain, but rotational action keeps the momentum going.

Jim Cramer: 3 Big Takeaways for Investors From Bank Earnings Calls

Jim Cramer
Jan 19, 2021 7:00 AM EST

The consumer continues to de-leverage at an extraordinary pace -- and the ramifications of this are extraordinary.

Wednesday's Woe, Biden's Plan, U.S. Dollar, J&J Vaccine, Trading Intel

Stephen Guilfoyle
Jan 14, 2021 7:22 AM EST

We are going to live again. You will dance in the aisle at some concert whose performer I have never heard of, and you will cheer for your favorite team in person again.

Federal Realty: Undervalued Dividend King With a High Yield

Bob Ciura
Jan 13, 2021 1:17 PM EST

There is a reason that there are just 30 Dividend Kings in the market.

Amid New Market Highs, Psychology and Valuation Warnings

Guy Ortmann
Jan 13, 2021 11:30 AM EST

Eager crowd buyers juxtaposed with actively selling insiders always raises a yellow flag.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:01 AM EST JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    I'll discuss price targets in my Saturday column.
  • 07:54 AM EST GARY BERMAN

    Friday Morning Fibocall for 1/22/2021

    SPX (Long-Term View) The 1/21/21 NEW high @ 3861...
  • 11:16 AM EST CHRIS VERSACE

    Worst Stocks to Buy for the Biden Presidency

    Biden's take on the minimum wage, likely moves on ...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login