The increasing demand for data centers amid the rising adoption of advanced technologies should drive the data center industry’s growth. So, we think one should consider buying shares of fundamentally sound data center company Equinix (EQIX). Conversely, we think Digital Realty (DLR) stock should be avoided for now because of the company’s deteriorating fundamentals. Read on.
The COVID-19 pandemic-led drove the increased adoption of remote lifestyles, and a rising dependence on advanced technologies has delivered opportunities for robust growth to the data center industry. The migration of businesses to cloud platforms has led to increasing demand for data continuing centers. In 2021, data center demand set a new record in the United States, absorbing 885.7 MW across 14 domestic markets, and registering a 44.3% increase year-over-year.
According to a report by BlueWeave Consulting, the global data center market is projected to reach $404.90 billion by 2028, growing at a 10.2% CAGR. The rising private-public investment in data center development is expected to fuel the market’s growth. Given the industry’s solid growth prospects, it could be wise to invest in quality data center stock Equinix, Inc. (EQIX).
However, not all data center stocks possess the requisite fundamentals to capitalize on the industry’s growth prospects. We think Digital Realty Trust, Inc. (DLR) is best avoided now, given its weak financials, history of huge losses, and bleak growth prospects.
Stock to Buy:
Equinix, Inc. (EQIX)
EQIX in Redwood City, Calif., is a leading digital infrastructure company that provides colocation space and related offerings. It operates through three segments, including America (AMER); Europe, the Middle East and Africa (EMEA); and Asia-Pacific (APAC). Its platform Equinix combines a global footprint of International Business Exchange (IBX) data centers in the AMER, APAC, and EMEA regions, interconnection solutions, business, and digital ecosystems, and edge services.
In May, EQIX expanded in Latin America with the completion of its acquisition of four data centers in Chile from Empresa Nacional de Telecomuniaciones SA, a leading Chilean telecommunications provider. The company plans to introduce a full range of interconnection and digital services to these data centers. The company is expected to expand its global footprint and boost profitability through this acquisition.
EQIX’s profits have increased 8.7% year-over-year to $1.73 billion in its fiscal 2022 first quarter, ended March 31, 2022. Its gross cash has improved 6% year-over-year to $1.15 billion. Its adjusted EBITDA rose 3.4% of the year-ago value to $799.71 million. And the company’s comprehensive income net of tax came in at $180.53 million, registering a rise of 197.9% year-over-year.
The $1.82 billion consensus revenue estimate for the fiscal 2022 second quarter, ending June 30, 2022, represents a 9.9% improvement from the same period in 2021. Analysts expect the company’s EPS for the current quarter to come in at $5.03, representing a 33.1% increase year-over-year.
Shares of EQIX have declined 4.3% in price over the past month and closed Friday’s trading session at $678.44.
EQIX’s POWR Ratings reflect this promising outlook. It has an overall B rating, which equates to Buy in our proprietary rating system. The POWR Ratings assesses stocks by 118 distinct factors, each with its own weighting.
EQIX has a B grade for Sentiment, Stability, Quality, Growth, and Momentum. Within the REITs-Data Centers industry, it is ranked #1 of 3 stocks. To see additional POWR Ratings (Value) for EQIX, click here.
Stock to Sell:
Digital Realty Trust, Inc. (DLR)
DLR in Austin, Tex., supports the world’s leading enterprises and service providers by delivering the full range of data center, colocation, and interconnection solutions. The company’s global data center platform PlatformDIGITALR combines its global presence with its proven Pervasive Datacenter Architecture (PDx) solution for scaling digital business and data management. The company offers more than 284 facilities in 48 metros across 23 countries.
On January 5, DLR announced that Digital Intrepid Holding BV, an indirect wholly-owned holding, and finance subsidiary of the company’s operating partnership, Digital Realty Trust, LP, priced an offering of €750 million of guaranteed notes due 2032. the notes will be payable annually in arrears at a rate of 1.375% per annum, and the notes will mature on July 18, 2032. This offering might increase the company’s debt and interest burden.
In its fiscal 2022 first quarter, ended March 31, 2022, DLR’s total operating expenses increased 9.8% year-over-year to $986.09 million. Its operating income declined 26.6% year-over-year to $141.24 million. Its EBITDA amounted to $576.34 million, down 31.7% year-over-year. Also, the company’s net income and net income per share came in at $76.91 million and $0.22, respectively, registering an 80.5% and 83.3% decline respectively year-over-year.
Analysts expect the company’s EPS to decline 37.8% year-over-year to $0.28 for the quarter ended June 30, 2022. Its EPS is expected to decline 27.3% in the next quarter and 80.3% in the current year.
The stock has plunged 23.2% in price year-to-date and 13.5% over the past year to close Friday’s trading session at $134.49.
DLR’s POWR Ratings reflects its poor prospects. The stock has an overall D rating, which translates to Sell in our POWR Ratings system.
DLR has an F grade for Growth and a D grade for Value and Sentiment. It is ranked last of the three stocks in the D-rated REITs-Data Centers industry. Click here to see additional POWR Ratings (Stability, Momentum, and Quality) for DLR.
EQIX shares were unchanged in premarket trading Monday. Year-to-date, EQIX has declined -19.06%, versus a -13.29% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.