Big Tech Continues Driving Data Center Growth: 5 Top Stocks to Buy Now

Technology

Published: March 6, 2019 6:45 am

Last Updated: January 30, 2020 11:52 pm

Despite the incredible growth of the need for data centers, which provide everything from cloud computing to streaming video, some on Wall Street have begun to lose their enthusiasm for it. The fact of the matter is that big technology companies like Amazon.com and Facebook are planning on massive capital expenditures in the arena for 2019, and many plan on increasing leased square footage.

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With these stocks cooling off some in the fourth quarter of 2018, some on Wall Street feel that growth will reaccelerate in 2019. SunTrust has a new report on the data center segment that is very bullish on the possibilities for this year and beyond. The report noted this:

We believe selected supplier commentary-inspired fears around data center investments and public data centers’ more conservative tone do not portend a secular shift, but rather a digestion period following a record leasing year. Our analysis suggests significant long-term growth expectations will require ~2x the capacity added over the next 5 years vs. the prior 5, while large internet/cloud service/social media company commentary highlights continued focus.

In addition, the SunTrust team feels that valuations at current levels are reasonable, with the top stocks trading at the low end of the range, which looks like 18 times estimated 2019 earnings. They also note that big tech will continue to invest in data center capabilities, and also said this as well:

On balance, we believe major cloud service providers’ fourth quarter 2018 earnings reports – i.e. Amazon, Alphabet, and Microsoft, – highlight continued focus on data center investments in order to sustain growth. Though difficult to precisely parse out, as comments regarding investments are generally inclusive of other non-data center spending, we generally believe company commentary refutes recent investor concerns emanating from negative news in the supply chain.

Five data center stocks are rated Buy at SunTrust, and all make sense for growth and income portfolios.

CoreSite Realty

This company offers among the highest payouts 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 4.33% distribution. The SunTrust price target for the shares is $120, while the Wall Street consensus target is $111.94. The stock closed on Tuesday at $101.61 a share.

CyrusOne

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 1000 or equivalent-sized companies.

Many analysts feel that some of the best returns in the data center arena may be found in the smaller players in the space like CyrusOne. Its 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 also has exhibited faster deployment times, rapid new market expansion and low churn among customers, and all are bullish reasons for buying the stock.

CyrusOne unitholders receive a 3.66% distribution. SunTrust has a $70 price objective, and the consensus target price is $60.71. The shares closed at $50.28 on Tuesday.