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Today’s bear market has created tremendous buying opportunities, with loads of stocks down 50% or more since last year. For example, real estate investment trust (REIT) Digital Realty Trust (DLR 1.17%) hasn’t been this cheap in five years. The company owns and leases over 300 high-quality data center facilities in 26 countries around the world.
Considering the long-term need for data center facilities and Digital Realty Trust’s position as a leading provider, is now the time to buy this top-tier stock? Let’s take a closer look and see.
To determine if Digital Realty Trust is a worthwhile investment at today’s five-year low, we have to look at the future of the data center industry. Data centers provide an integral service in our world today by helping store, aggregate, and distribute data safely. Everything that operates online — virtual meetings, cloud-based services or apps, browsing the internet on your mobile phone, social media accounts, streaming services, medical and legal records, online schooling, and countless other things — relies on the services of data center facilities.
The costly nature of constructing, operating, and maintaining a data center facility makes it far more cost-effective to lease space from operators like Digital Realty Trust, rather than companies building their own facilities. It also means supply is limited. Demand for data center space remains robust, and it’s expected demand will continue to outpace supply well into 2023.
Land and power availability have hindered a number of new facilities from being opened. But Digital Realty Trust can expand on existing land while continuing to use renewable power to operate. As of the third quarter of 2022, roughly 64% of its properties operated on renewable energy.
Another big challenge data center operators have faced since the onset of the pandemic is supply chain shortages of semiconductor chips — something data center facilities need in order to operate. The U.S. and Europe are taking aggressive steps to manufacture their own chip-processing plants in 2023 and 2024, which should ease chip constraints and pricing. But in the meantime, tenants will need to rely on existing operators for their data center needs, which is great news for Digital Realty Trust.
Data from Grand View Research forecasts the global data center automation industry to reach $20.9 billion by 2030, working out to a compound annual growth rate of roughly 13.5%, an absolutely staggering figure. Interconnections across data centers in different metro markets help improve the speed and efficiency of transmitting data, depending on where the user is located. Digital Realty Trust currently has 188,000 cross-connects across 54 metro markets, providing ample coverage for tenants in major cities across the world.
Several hedge funds and private equity firms acquired other data center operators in 2020 and 2021, leaving just two pure-play data center REITs for investors to choose from today. Digital Realty Trust is the smaller of the two, but it also has a much more approachable share price point, roughly $101 at the time of this writing.
Digital Realty Trust is currently trading at about 14 times its constant currency core funds from operation (FFO), a metric that works similarly to price to earnings. A price to FFO between 10 to 20 indicates a fair valuation of a REIT, meaning its price is attractive for its long-term growth potential. The stock may not rebound fully in 2023, but over the long term, it’s well-positioned to continue growing.
The stock has a BBB credit rating, no major debt maturities until 2024, and $176 million in liquidity. Its debt ratios are slightly elevated after its acquisition of South Africa-based data center company Teraco. However, the interconnections and revenue the assets will generate should help quickly improve its financial position in 2023.
Digital Realty Trust also offers investors a yield of just under 5%, which is almost triple the yield of the S&P 500. Plus, it has 17 years of consecutive dividend increases under its belt and ample coverage for its dividend payouts based on its latest earnings. Considering Digital Realty Trust remains one of the largest independent data center providers, today’s pricing is a great time to gain exposure to this fast-growing industry.
Liz Brumer-Smith has positions in Digital Realty Trust. The Motley Fool has positions in and recommends Digital Realty Trust. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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