Can These 3 REITs Help You Cash In On The AI Trend?

How can the AI revolution boost REIT stocks? Let's simplify this.

When you ask ChatGPT a simple question, it takes 3.6-36 kJ of energy. For context, a simple Google query consumes 1.08 KJ. As of November last year, ChatGPT had over 100 million weekly active users and counting. Analysts expect millions of new users to flock to ChatGPT and other generative AI apps for daily productivity, search, questions and answers, and other needs. To keep up with this huge energy demand, semiconductor companies are making GPUs. But GPUs need power and a lot of cooling. 

The CEOs of Uber and Salesforce are so impressed with this platform they put their own money behind it. Join them, invest in private credit, and earn 7-9% APY.

This is where data center REITs come in. They provide the necessary space and infrastructure for these GPUs and keep them running.

The demand for data centers is expected to skyrocket in the coming months and years on the back of the AI wave. Goldman Sachs estimates data center-driven power demand to grow at a CAGR of 15% through 2030. Companies developing AI applications and software are hungry for data centers to keep their systems operational. That's why data center space is becoming expensive and in shortage. According to datacenterHawk, the average vacancy rate of the top 10 data centers in North America fell to 2.88% during the first quarter of last year, significantly down from 8.3% in the prior year. 

In this context, let's examine the top three REIT stocks that can benefit from the rising appetite for AI data centers.

Equinix EQIX 

California-based REIT Equinix is at the forefront of the data center revolution thanks to its size and dominance in the industry. The company has 260 data centers spread across 33 countries, with major companies, including Amazon, Alphabet and Oracle, as its customers. Equinix is seeing a surge in demand as more companies flock to use its data centers. During the first quarter earnings call, Equinix's management said the company signed over 3,800 deals across more than 3,100 customers during the three months. 

As of the end of 2023, Equinix had 99.999%+ operational uptime and over 10,000 customers. The company also revealed about 50 new projects across 21 countries. Equinix's moat lies in its strong interconnection data centers, which major Cloud companies like Alphabet and Amazon use.

Wall Street is also bullish on Equinix. Recently, Mizuho started covering the stock with an Outperform rating, saying fundamentals for data centers are set to improve. Mizuho analyst Vikram Malhotra said Equinix's "ability to achieve consistent revenue growth and AI benefits are underappreciated." 

Don’t miss out: this property type is nearly recession-proof — see passive income real estate deals for accredited investors.

Digital Realty Trust Inc DLR

Digital Realty has over 5,000 customers in over 300 data centers across 25 countries. The AI-led demand in data centers is directly benefiting the company. Digital Realty's total bookings jumped to $252 million during the second quarter, more than $176 million recorded in the previous quarter. Amid strong demand, the company also upped its full-year forecast for renewal leases to 7% at the higher end, a one percentage point increase compared to the earlier forecast. Mizuho analyst Vikram Malhotra recently started covering the stock with an Outperform rating, praising the company's "hyperscale focus" that makes it a "real-time AI beneficiary."

The analyst sees a new path to "high single-digit earnings growth sustaining elevated multiples after several years of disappointing results" for the company.

Last month, JPMorgan upgraded the stock to Outperform and upped its price target to $175 from $150, saying the company would be a "substantial beneficiary" of Cloud and AI demand for data center capacity.

Another notable bullish call for the stock came from BMO Capital Markets analyst Ari Klein, who sees DLR's FFO growth accelerating amid rising prices, strong demand, and improvements in the balance sheet.

 "We believe DLR remains well-positioned as a play on the AI-thematic, particularly within REITs, with room for further multiple expansion," the analyst said.

Iron Mountain IRM 

Iron Mountain is another top data center REIT that can help investors cash in on the AI trend. The company is seeing direct benefits from the demand for AI-led data centers. During the first quarter, its storage rental revenue jumped 9.2% year over year. IRM's management said during the Q1 earnings call that the company signed a 24-megawatt, 12-year contract with a global technology company for data center space at its Virginia campus. In contrast, another "global IT consulting firm" was signed as a new customer. For 2024, the company affirmed its AFFO guidance of $4.39 and $4.51, which presents an 8% growth rate year over year at the midpoint.

Iron Mountain has about 240,000 customers across various segments as of the first quarter, including data backup, data centers, physical records storage and information management solutions. Wall Street is also turning bullish on the stock. Stifel analyst Shlomo Rosenbaum recently increased his price target on the stock to $103 from $86 while maintaining a Buy rating. The analyst believes the company's fundamentals remain strong for several years to come and its upcoming earnings could show strong performance compared to peers in the REIT industry.

Risks

Legacy data centers are a highly capital-intensive business, requiring significant cash for maintenance and updates. Famous shortseller Jim Chanos noted last year that it took Digital Realty $11 in new capital since 2016 to generate just $1 in new revenues. Skeptics also argue that data center companies face risks from the rise of Cloud companies, which are reducing the need for legacy data centers to store data. However, this threat may take decades to fully materialize. Additionally, investors should be mindful of high valuations when investing in data center stocks.

Looking For Higher-Yield Opportunities?

The current high-interest-rate environment has created an incredible opportunity for income-seeking investors to earn massive yields, but not through dividend stocks… Certain private market real estate investments are giving retail investors the opportunity to capitalize on these high-yield opportunities and Benzinga has identified some of the most attractive options for you to consider. 

For instance, the Ascent Income Fund from EquityMultiple targets stable income from senior commercial real estate debt positions and has a historical distribution yield of 12.1% backed by real assets. With payment priority and flexible liquidity options, the Ascent Income Fund is a cornerstone investment vehicle for income-focused investors. First-time investors with EquityMultiple can now invest in the Ascent Income Fund with a reduced minimum of just $5,000.

Don't miss out on this opportunity to take advantage of high-yield investments while rates are high. Check out Benzinga's favorite high-yield offerings. 

© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.