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

August 21, 2018 by 247lee

Source: Thinkstock
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.

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. The analysts said this after a strong quarterly report:

Digital reported strong results with record leasing and backlog and continues to see solid demand across its portfolio, a trend we expect to continue as the company capitalizes on its superior multi-region footprint with customers increasingly seeking deployments that span multiple geographies and product categories to better compete in the global market.

Investors receive a 3.26% distribution. The $130 Stifel price target compares with the $128.72 consensus target. The shares closed Monday at $123.80.

Interxion

This company doesn’t pay a distribution but is a top play for investors looking for European exposure. Interxion Holding N.V. (NYSE: INXN) builds and operates 39 carrier-neutral data centers in 11 countries across Europe, spanning nearly 100,000 square meters. The company services approximately 1,500 customers, consisting of network providers, managed service providers, financial services companies, digital media and distribution companies, and enterprises.

With over 600 connectivity providers, 21 European internet exchanges, and most leading cloud and digital media platforms across its footprint, Interxion has created connectivity, cloud, content and finance hubs that foster growing customer communities of interest.

Stifel likes the European exposure and said this:

The company exhibited solid bookings and has a sales pipeline that sets the stage for growth in the second half of 2018 and into 2019. Interxion is clearly among the best (if not the best) positioned for long-term growth in the European market given its leading share of network and compute nodes which enables it to capture an increasing level of Hyperscale activity and a key driver of enterprise migration.

Stifel has set its price objective at $74. The consensus target price is $72.16, and shares closed on Monday at $63.45.

QTS Realty Trust

This is another top data center pick that could be a takeover target. QTS Realty Trust Inc. (NYSE: QTS) is a leading provider of secure, compliant data center solutions, hybrid cloud and fully managed services. Its integrated technology service platform of custom data center, colocation and cloud and managed services provides flexible, scalable, secure IT solutions for web and IT applications.

The company’s Critical Facilities Management provides increased efficiency and greater performance for third-party data center owners and operators. QTS owns, operates or manages 24 data centers and supports more than 1,000 customers in North America, Europe and Asia-Pacific.

The analysts are somewhat more cautious on the shares:

QTS has been able to deliver 2 consecutive quarters of solid leasing and financial performance, and so far, management has delivered steady execution on its newly minted strategic plan as non-core C3/cloud and managed service assets have been transitioned to GDT, a company that does data center modernization more rapidly and seamlessly than we expected, which has been supported by promising customer retention. While we are certainly encouraged by management’s performance and commentary around strength in the hyperscale pipeline, we believe QTS remains in a ‘prove it’ stage as investors test the waters of re-entry

Investors receive a 3.72% distribution. The Stifel price target is $48. The consensus target is $46.43, and shares closed Monday at $44.14.

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All of these, with the exception of Interxion, are very solid total return plays in an industry that sees no signs of slowing down. While the stocks have rallied from levels printed in the spring, they still have good upside potential, and are somewhat safer ways to play technology and entertainment content.