While capital spending on the hardware going inside of cloud data centers has temporarily cooled this year, spending on data center construction still looks very strong.
Alphabet/Google (GOOGL) provided the latest evidence on Friday, when it announced that it's spending €3 billion ($3.3 billion) to expand its European data center footprint over the next two years. The announcement comes seven months after Google said it would invest $13 billion in the U.S. on data centers and offices in 2019.
Over the course of this year, Google has also announced plans for new data centers in Nevada, Utah, the Netherlands and South Korea. Meanwhile, in spite of this year's slowdown in data center hardware spend, CFO Ruth Porat has said on Alphabet's earnings calls that the company's total capital spending will rise this year -- albeit with a greater mix of data center spending relative to hardware spending.
Separately, Bloomberg reported on Thursday that data center real estate investment trust (REIT) CyrusOne (CONE) has received buyout interest from peer Digital Realty Trust (DLR) , as well as from investment firms EQT Partners and Colony Partners. The M&A overtures are said to be separate from the ones that led CyrusOne to start exploring a sale this summer.
If Digital Realty was to buy CyrusOne, it wouldn't be the company's first big acquisition in recent years. Last year, the company spent $1.8 billion to buy Brazilian data center owner Ascenty. And in 2015, it spent $1.9 billion to buy data center owner Telx.
In August, research firm IHS forecast that a whopping 14 million square feet of data center capacity would be added globally in 2019, via 135 projects to build new data centers and expand existing ones. The firm also noted that another 4.5 million square feet of capacity had already been announced for the first half of 2020.
Simply put, while many cloud giants have been spending less this year on servers, storage equipment and the chips that go inside of them, as they digest the capacity they built up amid a big 2018 spending surge, spending on actual data centers by cloud giants and independent data center owners, which is driven more by their long-term forecasts for infrastructure needs, has held up pretty well.
While hardware spending can fluctuate thanks to inventory swings as well as things such as the timing of new server CPU launches, the trends that have been driving giant data center investments aren't letting up. Among those trends: The growth of online video and other bandwidth-demanding services; the adoption of more compute-intensive algorithms to power services such as search engines and news feeds; large investments in both training AI models and deploying services relying on those AI models; and the ongoing adoption of cloud apps and infrastructures by enterprises.
All of this is naturally good news for data center REITs such as Digital Realty, CyrusOne, Equinix (EQIX) and CoreSite Realty (COR) , which profit from cloud data center investments via both colocation services for hosting data center equipment as well as network interconnection services. And with the shares of these four companies up, respectively, 17%, 46%, 62% and 37% amid both strong industry demand and a favorable interest rate environment, markets definitely haven't failed to take notice.
The ongoing strength in data center construction is also, ultimately, good news for chip and hardware suppliers with strong cloud exposure -- think names such as Nvidia (NVDA) , Micron (MU) , Western Digital (WDC) and Arista Networks (ANET) . While many of these firms have seen their cloud-related orders drop meaningfully this year, they might not have to wait too long before orders pick up, given the long-term infrastructure needs of the cloud giants and their commitment to making big data center-related investments.
