Which companies can benefit from the AI data centre boom? 🎯

Investments in data centres are becoming increasingly attractive due to the rapid expansion of data-driven technologies, particularly AI. As consumers and businesses are projected to generate twice as much data in the next five years as they have in the past decade, the need for robust data storage and processing facilities is surging. This demand is further amplified by the growth of cloud computing, e-commerce, and streaming services, all of which rely heavily on data centres. Additionally, data centres are evolving to meet the energy demands of AI, which requires significant power for operations, making investments in energy-efficient designs and sustainable energy sources essential. This scenario presents a lucrative opportunity for investors as data centres are not only a critical part of the digital infrastructure but also offer stable, long-term growth potential.

Where can potential investment opportunities be found?

Investors can engage in the data centre market through various avenues. One primary method is investing directly in companies that own and operate data centres, such as Digital Realty Trust and Equinix, both of which offer attractive dividend yields and have a strong presence globally. Another option is through Real Estate Investment Trusts (like American Tower or Crown Castle), that focus on data centre properties, wireless and broadcast communications infrastructure, providing a way to invest in this sector with potentially lower risk and steady income streams. Additionally, investors can consider technology giants like Amazon and Microsoft, which have substantial data centre operations integral to their cloud services. Exchange-Traded Funds (ETFs) specializing in technology and infrastructure also offer diversified exposure to data centre investments. For those looking for high growth potential, venture capital and private equity investments in emerging data centre technologies and startups present an avenue.

Potential winners

Crown Castle (CCI.US) is the largest provider of shared communications infrastructure in the U.S., managing over 40,000 cell towers, 115,000 on-air or under-contract small cell nodes, and 85,000 miles of fiber. As a REIT, Crown Castle focuses on supporting wireless carriers and emerging technologies like 5G and smart cities. With a disciplined capital allocation strategy and a commitment to sustainable growth, Crown Castle is well-positioned to benefit from the increasing demand for robust digital infrastructure, making it a strong investment in the communications sector.

Source: xStation 5

American Tower Corporation (AMT.US) is a leading company in terms of leasing communications sites, data centers and antenna systems. It operates in over 25 countries with over 180 000 assets worldwide, apart from U.S. and Canada, where it has over 42 000. The company cooperates mainly with huge clients on telecommunications market such as T-Mobile, AT&T or Verizon. Therefore, its leases are usually non-cancellable and quite stable. The leases have embedded annual escalators, which in the case of the U.S. Market are typically fixed at an average of approximately 3% and on other international markets are based on local inflation indices. Such rules make it most profitable for American Tower Corporation when inflation rate in U.S. is under control and easy to predict. The company has stable EBITDA margin at around 63% and still improves its operating margin. 

Another stock operating in data centers segment is Digital Realty Trust (DLR.US). Company provides full spectrum of data center, colocation and interconnection solutions. Its main product, PlatformDIGITALR, provides solutions for scaling digital businesses and enables them to manage challenges associated with collecting data. The company recently updated its financial guidance for 2024, estimating revenue growth only around 1%, which would be the slowest increase in revenue in the past 4 years. It increased its Rental Rates on Revewals Leases outlook to 5-7% from 4-6%, which still means probably worse performance than in 2023. The company has reported a record backlog of 541 Million $, however only 51% of it will be commenced in 2024, therefore for more significant increases in company results investors might have to wait for upcoming years. Digital Realty Trust compared to its peers doesn’t show huge discount, when it comes to relative multiples such as forward P/E or forward P/FFO.