Technology

Top Analyst Raises Targets on Red-Hot Data Center Stocks

If any area in the technology world has been robust over the past few years it’s the data center stocks, and with good reason. Demand for streaming, cloud computing, storage, gaming and so much more grows sequentially every year, and that demand is not slowing down any time soon. In addition, big technology companies like Amazon and Facebook are planning on continued capital expenditures in the arena for 2020 and beyond, and some may even be increasing leased square footage.


In a new Stifel report, highly regarded analyst Erik Rasmussen and his team remain very positive on the industry and feel that growth going forward should remain very consistent. The report said this:

We continue to favor data centers, and highlight their business models that have proven to be more durable and earnings that are less volatile than most sectors. Even as Data Centers tear-to-date have meaningfully outperformed both the REIT sector and the broader equity markets (DCs +20.8% vs. RMS –17.9% and the S&P 500 +1.4%), we continue to recommend our Buy rated names as enterprises accelerate their evolution from traditional to digital businesses that can utilize new tools to dynamically scale their IT infrastructure, adopt hybrid multi-cloud architectures, and interconnect with strategic business partners. We believe second quarter numbers will be generally positive and at least in-line to slightly above expectations as bookings sustain and expect this positive momentum to build as we move throughout the year (offering potential for slightly raised 2020 outlooks, but also a good set-up for numbers to move higher in 2021.

These four top stocks are rated Buy, and Stifel raised price targets on three of them. It’s important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

CyrusOne

This is one of Stifel’s two top picks 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 1,000, 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 group may be found in the smaller players in the space like CyrusOne. The company 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, all bullish reasons for buying the stock.

The Stifel report said this:

We continue to recognize CyrusOne as a disruptive force in the wholesale data center market, capturing share gains on strong leasing momentum with both hyperscale and enterprise customers. We believe CONE’s ability to bring differentiation around development and its well trained and growing enterprise-oriented salesforce is tough to replicate and thus should enable the company to drive incremental share gains vs. larger competitors. The company has historically been U.S. focused, but we believe its international expansion plans further position the company for success in cloud, while it is supported by a capital structure that prudently maximizes returns.

Unitholders receive a 2.48% distribution. The Stifel price objective was raised to $86 from $80, while the consensus target is $79.94. CyrusOne stock closed at $80.52 a share on Tuesday.

Digital Realty Trust

This top data center stock 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 and 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. They said this:

We believe Digital Realty continues to maintain one of the highest quality real estate portfolios in the data center industry with favorable owner economics, superior risk-adjusted total returns, and an investment grade balance sheet, while also being well positioned in several of the world’s most active markets in terms of customer demand with capacity for expansion. As such, we view DLR as a core holding for equity income and real estate portfolios even as the company drives higher returns on the asset base by further diversifying its product offering.

Investors receive a 2.91% distribution. Stifel kept its price target is at $155. The consensus price target $150.55, and Digital Realty Trust stock closed Tuesday at $153.97.