Why Data Center Stocks May Be the Best Buy for the Rest of 2018

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Think about the sheer amount of computing and data storage that goes on every single day. Then ponder the incredible amount of content streaming that goes on every day, both audio and video. Over-the-top streaming services like Hulu dominate younger demographics, and that is a reality that is changing the face of entertainment.

The bottom line is that data center demand to keep up with the growing need for storage, computing and content will continue to grow.

A new Stifel research report includes a wrap-up on second-quarter results and also looks at demand for the rest of the year. The report noted this:

Data centers on the whole posted a solid quarter, as management teams reported impressive bookings and growing backlogs with business outlooks through the end of the year (and into 2019) largely intact or slightly improved – with the exception of some currency concerns. Customers are increasingly adopting Hybrid IT solutions, requiring more comprehensive and diverse product offerings, with a focus on network breadth (i.e. international expansion), which data centers are successfully addressing through acquisitions/partnerships and organic growth initiatives. We continue to view geographic diversity in the network and product differentiation as primary drivers of growth over both the near and longer terms for data centers, and would point investors toward companies which are focused on developing these aspects of the business.

Five stocks are Buy rated, with two being top picks.

CyrusOne

This is one of the two top picks at Stifel. 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 1000 or equivalent-sized companies.

The company trades at numerous lower multiples than its bigger competition, and the analysts feel that the discount valuation is not warranted given the recent surge in leasing and above-average growth. The company also has exhibited faster deployment times, rapid new market expansion and low churn among customers, and all are bullish reasons for buying the stock. Stifel said this:

CyrusOne’s initiatives on the international front should position it well to capture what management views as the most significant demand backdrop it has encountered (in line with what we have previously highlighted), with enough flexibility to take advantage of additional opportunities from a balance sheet perspective.

CyrusOne unitholders receive a 2.74% distribution. The Stifel price objective is $72, while the Wall Street consensus target is $69.94. The shares closed Monday at $67.21.

Equinix

This is one of the larger cap companies in the industry and the other top pick at Stifel. Equinix Inc. (NASDAQ: EQIX) provides data center services to protect and connect the information assets for the enterprises, financial services companies, and content and network providers primarily in the Americas, Europe, the Middle East, Africa and the Asia-Pacific.

The company provides colocation services and related offerings, including operations space, storage space, cabinets and power for customers colocation needs; interconnection services, comprising physical cross connect/direct interconnections, Equinix Internet Exchange, Equinix Cloud Exchange, Equinix Metro Connect and Internet connectivity services; and managed IT infrastructure services, including installation of customer equipment and cabling, as well as equipment rebooting and power cycling, card swapping and emergency equipment replacement services.

The Stifel report said this:

While currency headwinds can create volatility in performance on a quarter to quarter basis, management has largely maintained its positive outlook for the company (organically) over the near term as the strong bookings pipeline positions the company well for growth in the second half of 2018 and heading into 2019 – particularly as recently acquired Verizon assets rationalize and begin to drive additional opportunities and factoring in a very active pipeline with 32 expansion projects underway.

Investors receive a 2.09% distribution. Stifel has a $500 target, while the consensus target is $502.30. The shares closed Monday at $436.05.