In the past week, many stocks connected to artificial intelligence (AI) experienced declines, reflecting a more cautious investor sentiment following recent earnings disclosures. These results indicate that not all ventures tied to AI technology are delivering anticipated returns either as promptly or as robustly as initially forecasted. Such performance nuances prompt investors to critically reassess the composition of their AI-related holdings.
Nonetheless, these market fluctuations should not obscure the broader trajectory of growth within the AI sector. The expansion is both substantial and indispensable. Cathie Wood of ARK Invest, a notable figure within technology investment circles, forecasts that the AI data center segment alone will surge in value from the current $500 billion per annum towards approximately $1.4 trillion by 2030. This projection aligns closely with estimates presented by Gartner, a leading technology consulting entity.
Given these expectations, investor strategies must adapt to the most promising segments within this rapidly evolving market. While companies such as Nvidia, known for their hardware manufacturing, and Palantir Technologies, recognized for decision-intelligence software, maintain significant roles in AI’s future, the most potent avenues for growth currently reside within the data center infrastructure domain.
However, the operational models and investment dynamics of companies providing data center services differ markedly from conventional hardware or software enterprises. Here, real estate investment trusts (REITs) that own and operate data center properties, notably Equinix and Digital Realty Trust, offer distinctive advantages for investors aiming to leverage AI infrastructure expansion.
The Advantage of REITs in AI Data Center Investment
The AI technology landscape currently exhibits great flexibility. Some firms utilize third-party processor chips while others opt to develop proprietary hardware. Moreover, several established technology companies with expertise in constructing and managing in-house data centers still choose to lease space in third-party AI data centers. This leasing model dominates AI data center utilization, generating recurring rental income streams for the facility operators.
This leasing preference suggests that the most compelling investment opportunities in the AI sector may not be tied primarily to one-off hardware sales but rather to continuous income derived from property leases. Consequently, traditional company structures focused on product sales may not offer the optimal entry point.
In contrast, REITs, which are specialized firms that own portfolios of income-generating real estate, provide a compelling vehicle for participation in this recurring revenue model. Their assets span across various property types including office buildings, hotels, apartments, shopping malls, and increasingly, cloud-accessible data centers that host servers, storage systems, and AI computational platforms.
The inherent stability in cash flow from leased properties suits REITs well for supporting regular dividend payments. Additionally, REITs enjoy a favorable tax framework: by distributing the bulk of their earnings as dividends, they avoid corporate-level taxation on those profits. This structural advantage potentially enhances shareholder value compared to standard corporate entities, as investors receive income largely untaxed at the corporate tier.
Profiling Two Leading Data Center REITs
Within the data center REIT segment, Equinix and Digital Realty Trust are prominent and substantial participants. Both firms operate hundreds of data center facilities across numerous metropolitan regions worldwide, underpinning services for thousands of clients.
Digital Realty Trust identifies itself as the world’s largest data center platform, boasting ownership of more than 300 facilities in over 50 cities globally. Its expansive client base includes leading software corporations such as SAP and telecommunications leaders like AT&T. Projections suggest its annual revenues will slightly exceed $6 billion with earnings around $3.60 per share anticipated for 2024, compared to $1.61 per share in the previous year. Demonstrating consistent adaptability, Digital Realty Trust has achieved two decades of consecutive top-line growth. The current dividend yield for new investors stands near 3%, reflecting its sustained cash flow generation.
Equinix, a similarly scaled REIT, also delivers steady profitability which supports dividend payments forecasted to yield slightly over 2.3% relative to current pricing. Unlike Digital Realty, Equinix offers additional features such as software-defined networking solutions, affording clients dynamic control over their platform interconnections, a potential differentiator in customer retention and service customization.
Market analyst consensus is optimistic for both companies. A significant majority covering Equinix label it a strong buy, with an average price target approximately 20% above current market value. Digital Realty Trust also appears undervalued by comparable metrics, positioning both as attractive propositions for long-term investors seeking exposure to AI infrastructure growth.
Balancing Income and Growth Objectives
Investors prioritizing income generation can benefit from the consistent dividends REITs typically provide. For instance, Equinix recently announced a 10% increase in its per-share dividend, signaling confidence in ongoing cash flow stability. Digital Realty paused dividend growth in 2023 to reallocate capital towards investing in its AI infrastructure capabilities, a strategic decision amid critical industry transitions. Despite this pause, revenue and earnings trends remain positive, with analysts projecting a 12% year-over-year revenue increase for 2025, and anticipations of continued growth extending through at least 2028.
These data affirm that both Equinix and Digital Realty Trust are likely positioned to reap benefits connected to the wide-scale growth of AI data centers over a sustained timeframe. Importantly, this positions REITs as key investment vehicles reflecting AI’s ongoing evolution rather than more speculative hardware or software stock plays.
Investors must, therefore, consider an expanded definition of AI-related investment opportunities that accounts for infrastructure and real estate components critical to the sector’s expansion.