It hardly takes a technology genius to realize that internet use, cloud computing and storage, and massive data streaming have become ubiquitous. The incredible thing is that the huge growth is only going to continue as new applications and devices, and a host of other uses, become popular. Regardless of what hardware and software comes and goes, the servers and data centers that serve consumers are going to continue to thrive.
A new research report from the analysts at SunTrust Robinson Humphrey notes that the data center stocks, which had a big run the past two years, are down large since November. The report noted this:
Driven by a combination of a less-than-robust data center earnings season, and the consummation of the “tax-trade” that morphed into broader fears of increasing rates, data centers have under-performed the REIT index by ~5% based on our market cap-weighted index of covered companies since the start of November 2017. However, with strong growth drivers and upside to recently-established 2018 guidance, we believe selling pressure will abate and this volatility offers investors an opportunity to buy stocks with long-term secular growth and discount valuations.
The analysts are very positive on six companies in the sector, and all are rated Buy.
This company offers among the highest payout to investors in the group. CoreSite Realty Corp. (NYSE: COR) delivers secure, reliable, high-performance data center and interconnection solutions to a growing customer ecosystem across eight key North American markets. More than 900 of the world’s leading enterprises, network operators, cloud providers and supporting service providers choose CoreSite to connect, protect and optimize their performance-sensitive data, applications and computing workloads.
CoreSite’s scalable, flexible solutions and more than 350 dedicated employees consistently deliver unmatched data center options — all of which leads to a best-in-class customer experience and lasting relationships.
CoreSite investors receive a very generous 4.0% distribution. The SunTrust price target for the shares is $133, and the Wall Street consensus target is $115.33. The shares closed Friday at $98.19.
This is another top pick among the data center stocks. CyrusOne Inc. (NASDAQ: CONE) designs, builds and operates facilities across the United States, Europe and Asia that give its customers the flexibility and scale to match their specific growth needs. Specializing in highly reliable enterprise-class, carrier-neutral data center properties, the company provides robust data center infrastructure to ensure the continued operation of IT equipment for a rapidly growing list of organizations that now nears 900, including nine of the Fortune 20 and more than 160 of the Fortune 1,000 or equivalent-sized companies.
Many analysts feel that some of the best returns in the data center sector may be found in the smaller players in the space like CyrusOne. The stock trades at numerous lower multiples than their bigger competition and top analysts feel that the discount valuation is not warranted given the recent surge in leasing and above-average growth. The company has also exhibited faster deployment times, rapid new market expansion and low churn among customers, all bullish reasons for buying the stock.
CyrusOne unitholders are paid a 3.7% distribution. SunTrust has a $75 price objective, while the consensus target price is set at $64.88. The shares closed Friday at $49.66.
Digital Realty Trust
This top data center company also is a solid play on the huge cloud and streaming content revolution. Digital Realty Trust Inc. (NYSE: DLR) supports the data center and colocation strategies of more than 600 firms across its secure, network-rich portfolio of data centers located throughout North America, Europe, Asia and Australia. Digital Realty’s clients include domestic and international companies of all sizes, ranging from financial services, cloud and information technology services, to manufacturing, energy, gaming, life sciences and consumer products. The company rates highest with portfolio managers as 8.39% of the market cap of the company is in institutional hands.
The analysts cite the solid dividend, and the potential for dividend growth. They also feel that data center pricing is still favorable, and the growth in adoption of the cloud is a positive going forward. Lastly, they feel the stock is underweighted by active managers, and could see an uptick if they started adding shares.
Digital Realty investors receive a 3.9% distribution. The $140 SunTrust price target compares with a $121.44 consensus target. The shares closed Friday at $103.14.