Best data center stocks: A guide for 2024
Explore the top data center stocks to invest in with our comprehensive guide for 2024.
A data center serves as a facility housing interconnected computers for data processing, storage, and sharing, serving as a cornerstone for cloud computing and AI applications, critical for various businesses and organizations. The expanding demand for cloud computing and AI has propelled the growth of companies involved in the data center industry. This surge in demand has notably impacted stock prices of chipmakers like Nvidia and Advanced Micro Devices, as well as major cloud service providers such as Amazon, Microsoft, and Google. Investment bank UBS anticipates a 15%-20% growth in the data center sector this year. While dedicated data center stocks have yet to experience similar rapid growth, they present a promising opportunity for investors. In this guide, we offer a comprehensive analysis of the top 10 data center stocks.
Best data center stocks to buy in 2024
- Equinix: A US-based, large-cap data center real estate investment trust (REIT) that leases server space and provides high-speed direct internet connections. With operations in 33 countries across five continents, it manages 260 data centers.
- Prologis: Specializing in leasing to logistics firms, this REIT is expanding into data center construction and leasing with plans to invest over $25 billion. It boasts ownership of 5,613 buildings spanning 1.2 billion square feet.
- Vertiv: A US company offering power, cooling, and IT infrastructure services to data centers. It supplies various equipment like embedded computing systems, static transfer switches, and data center racks.
- Eaton Corporation: An Irish company providing power management solutions, electrical components, and systems to data centers, as well as other industries like utility, machine building, aerospace, and mobility markets.
- Digital Realty Trust: A global real estate investment trust (REIT) operating 300 data centers in 25 countries, providing data center and colocation services.
Now, let's delve deeper into the data center stocks worth monitoring in 2024:
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Equinix generates revenue by leasing server space and offering high-speed internet connections to enterprises. However, the stock has experienced a decline of over 13% in the last month following a critical report by short seller Hindenburg Research. The report alleges Equinix overstated its adjusted funds from operations (AFFO), a pivotal metric for REITs.
Equinix's Board of Directors announced an independent inquiry into the allegations. The company emphasized its commitment to transparency in financial reporting and reiterated its confidence in long-term prospects despite the short seller's motivations for driving down Equinix's stock price.
Scalability Global presence Reliability and uptime Interconnection services Compliance and security.png)
Regulatory challenges Dependency on infrastructure
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Prologis views its venture into data center leasing as a natural progression of its support for logistics firms. Over the last three years, it has collaborated with Skybox Datacenters to establish data centers in suburban Chicago and Texas. The company is capitalizing on multiple favorable trends.
Its logistics segment is experiencing expansion due to increased investment in e-commerce and enhanced supply chain management. The incorporation of data centers, as previously mentioned, is being propelled by the trend of AI adoption. Prologis observed an 8.7% increase in core FFO per share last year, reaching $5.61, alongside a significant 34.3% surge in revenue to $8 billion. Prologis plans to acquire or construct 20 data centers over the next five years and anticipates over 100 opportunities in the long run.
Global presence Customer support Industry leadership Innovative technologies Focus on sustainability Technological obsolescence Dependence on economic conditions
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Vertiv Holdings, which went public four years ago, is experiencing significant growth in the sale of its equipment to data centers. This equipment encompasses a wide range of products, including embedded computing systems, power and UPS systems, static transfer switches, as well as data center racks, cabinets, and enclosure solutions. Over the last five quarters, its net income has surged by over 774%.
In 2023, Vertiv achieved sales of $5.4 billion, marking a 24.6% increase, and recorded full-year earnings per share (EPS) of $1.19, compared to a loss per share of $0.04 in 2022. For 2024, the company anticipates sales to range between $7.51 billion and $7.66 billion, representing a 40.2% increase at the midpoint. It also projects adjusted EPS to fall between $2.20 and $2.26.
Global presence Industry leader Innovative solutions Comprehensive support Focus on sustainability Supply chain risks Regulatory compliance Technological disruption
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Operating in the Electrical and Industrial sectors, Eaton anticipates a 14% growth in data center and IT projects within its Electrical segment this year. The company offers data center performance management (DCPM) software and thermal management products for data centers, in addition to server and network racks.
In 2023, Eaton achieved record sales of $23.2 billion, marking a 12% increase, while EPS reached $8.02, also up by 12%. The growth was predominantly driven by sales to data centers and utilities. For the current year, the company anticipates revenue growth ranging between 6.5% and 8.5%, with adjusted EPS projected to fall between $9.95 and $10.35, representing an 11% increase at the midpoint compared to 2023.
Global presence Ecosystem connectivity Sustainability initiatives Flexible deployment options Geopolitical risks Data sovereignty concerns Complexity of interconnection
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Digital Realty is the foremost cloud and carrier-neutral data center REIT, offering colocation and interconnection services. With a presence on every continent except Antarctica, the company stands as a global leader. Notably, on April 1, it was chosen to host one of the world's most powerful AI supercomputers at its data center in Denmark. Digital Realty boasts a record backlog, and its lease renewals have reached their highest levels in nine years.
In the previous year, Digital Realty recorded revenue of $5.48 billion, marking a 16.7% increase, with funds from operations (FFO) per share reaching $6.20, up by 5.6%. Its core FFO per share stood at $6.59, a slight decrease from $6.70 in 2022. Digital Realty anticipates revenue to range between $5.55 billion and $5.65 billion for the upcoming period, representing a 2% increase at the midpoint. The company projects core FFO per share to fall between $6.60 and $6.75, reflecting a 1.2% increase at the midpoint.
Global footprint Financial stability Reliability and security Ecosystem connectivity Regulatory compliance Technological obsolescence Dependence on infrastructure
Types of data center stocks
There are two primary categories of data center stocks: data center REITs and data center equipment or services companies.
Data center REITs own and manage physical data centers, leasing space to businesses for colocation services. Their revenue is generated through rent charges, offering relatively lower volatility compared to other types of REITs. Examples include Digital Realty Trust, Equinix, and Iron Mountain. Similar to many REITs, they typically offer above-average dividends as they are required to distribute 90% of their taxable income to investors.
On the other hand, data center equipment and services companies manufacture and provide equipment, hardware, software, and services utilized by data centers. This encompasses servers, storage devices, cooling systems, network equipment, and electrical infrastructure. They often exhibit higher growth potential compared to data center REITs but are also more prone to volatility. Examples include Eaton Corporation, Vertiv Holdings, Arista Networks, and Oracle Corporation.
What is driving the surge in data center stock prices?
As per a study conducted by Prescient & Strategic Intelligence, the worldwide data center market is projected to surpass $622.4 billion by 2030, up from $301.8 billion in 2023, indicating a compound annual growth rate (CAGR) of 10.5% during this timeframe.
Now, let's explore the primary drivers behind this anticipated exponential growth:
Transition to cloud computing
Major cloud providers like Amazon Web Services (AWS), Microsoft Azure, and Google Cloud Platform require extensive data center infrastructure to store and operate applications for their clientele. As cloud computing continues to gain traction, there will be a corresponding surge in demand for data center capacity. These cloud giants have announced significant investments in data center expansion to accommodate the increasing adoption of AI technology.
For instance, AWS revealed plans to invest $35 billion in constructing cloud data center campuses in Virginia by 2040, with an additional $14.6 billion earmarked for its existing facilities in Japan by 2027. In March, it announced a $5.3 billion investment in data centers in Saudi Arabia. Microsoft also disclosed a £2.5 billion ($3.2 billion) investment over the next three years to bolster its data center infrastructure in the UK, and a €3.2 billion ($3.4 billion) investment by 2025 to enhance AI and cloud capacities in its German data centers. Similarly, Google Cloud announced a $1 billion investment to build a new data center in the UK.
Emergence of big data
The proliferation of AI, big data analytics, and the Internet of Things (IoT) is leading to an explosion in data generation. Both organizations and individuals are generating unprecedented volumes of data, necessitating secure storage solutions and driving demand for data center space. Advanced AI models, such as OpenAI's GPT-3 and AI21 Labs' Jurassic-1, rely on vast datasets for training and operation, further contributing to the need for robust data center infrastructure.
Advancements in technology
Technological advancements like 5G, new software platforms, and remote work paradigms are generating substantial amounts of data and requiring enhanced processing capabilities. The shift towards remote work has intensified the demand for superior cloud services and faster network speeds. The widespread usage of mobile devices is also fueling the need for additional data centers.
Moreover, the digital transformation across various industries and organic industry growth will drive increased demand for specialized data center infrastructure and services. McKinsey's 2023 report outlines four primary components of data centers: the facility itself, industrial equipment (including mechanical, electrical, and plumbing gear), IT hardware, and software. Additionally, data center operations and ancillary services like power and connectivity present significant growth opportunities.
In the US market, which constitutes approximately 40% of the global market, McKinsey forecasts demand for data centers to reach 35 gigawatts (GW) by 2030, up from 17 GW in 2022, as measured by power consumption reflecting server capacity.
In conclusion, while data center stocks may not be perceived as inexpensive, they have yet to receive full recognition, despite many experiencing significant share growth over the past year.
While investors have often gravitated towards more conspicuous AI investments, data center stocks stand to benefit from numerous long-term trends. The expansion of big data, rapid adoption of AI, and the demand for robust computing power all signal promising growth prospects for data center stocks.
Hence, the potential for growth in data center stocks is justified, making it opportune for investors to consider purchasing them now before their valuations surge.
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