DLR: Record AI Demand Pipeline Will Drive Upside Despite Power Constraints

Analysts nudged their fair value estimate for Digital Realty Trust slightly higher to approximately $199.22 from about $199.19, citing recent price target increases and upgrades that highlight the stock's attractive valuation, stable growth profile, and strengthening demand pipeline.

Analyst Commentary

Recent Street research reflects a generally constructive stance on Digital Realty Trust, with price targets moving higher and ratings shifting into more positive territory as analysts reassess the company’s growth durability and demand backdrop.

Bullish Takeaways

Bullish analysts highlight that the recent consolidation in the share price has created a more compelling entry point for a stable growth company, supporting higher fair value estimates.
Upside in the latest quarterly results and an increase in full year guidance are viewed as evidence that management is executing well against its growth plan, even amid a mixed macro environment.
A record demand pipeline and strong customer engagement, including in key markets like Charlotte, underpin confidence in multiyear leasing momentum and cash flow visibility.
The predictable, less employment-sensitive nature of data center demand is seen as a structural advantage, helping to support premium valuation multiples relative to more cyclical real estate segments.

Bearish Takeaways

Bearish analysts point to slight downside in recent leasing metrics as a reminder that translating robust pipelines into signed deals and cash flows may prove uneven from quarter to quarter.
Some remain cautious that, following the recent rerating, further multiple expansion could be limited without a sustained acceleration in leasing and development returns.
There is concern that slowing macro trends could still weigh on certain customer verticals, raising the bar for management to maintain the current growth trajectory and justify higher price targets.
Execution risk around delivering on raised guidance and scaling new capacity efficiently is cited as a key factor that could pressure valuation if performance falls short of elevated expectations.

What's in the News

Two major Digital Realty and Stack Infrastructure data centers in Santa Clara, California remain built but unpowered, with local utility constraints expected to delay energization for years (Bloomberg)
Expanded collaboration with NVIDIA at Digital Realty's Manassas, Virginia campus to advance next generation AI infrastructure, including an AI Factory Research Center, liquid cooling, and innovative power and efficiency approaches
Raised 2025 guidance, with total revenue now expected between $6.025 billion and $6.075 billion and net income per diluted share guided to $3.57 to $3.62
New three way collaboration with Dell Technologies and DXC to deploy Dell AI Factory on Digital Realty's PlatformDIGITAL, offering validated private AI use cases and end to end implementation and management for enterprise customers
Launch of the Digital Realty Innovation Lab in Northern Virginia, a live data center test environment for AI and hybrid cloud workloads, featuring partners such as AMD, Cisco, Supermicro, and Vcinity

Valuation Changes

Fair Value Estimate has risen slightly to approximately $199.22 from about $199.19 per share, reflecting a marginally more constructive long term outlook.
Discount Rate has fallen slightly to roughly 7.82% from about 7.83%, modestly lowering the hurdle rate applied to future cash flows.
Revenue Growth Forecast has increased slightly to around 12.98% from roughly 12.96%, indicating a marginally stronger top line growth expectation.
Net Profit Margin Outlook has edged down slightly to about 13.92% from roughly 13.93%, suggesting a near unchanged but fractionally lower profitability profile.
Future P/E Multiple has declined very slightly to approximately 77.52x from about 77.52x previously, leaving the long term valuation multiple essentially unchanged.

Strong demand for data center capacity and strategic expansions position Digital Realty for future revenue growth and improved profitability.
Sustainability initiatives like green data centers and renewable energy use can enhance cost savings and market position.
Rapid expansion in U.S. markets risks oversupplying demand, facing competitive pressures and interest rate fluctuations impacting profitability and revenue growth.

Catalysts

About Digital Realty Trust

Digital Realty brings companies and data together by delivering the full spectrum of data center, colocation, and interconnection solutions.What are the underlying business or industry changes driving this perspective?

Digital Realty's record backlog of leases, which have not yet commenced, indicates strong future revenue potential and earnings growth due to steady demand for data center capacity, particularly from AI and cloud service providers.
The successful formation of Digital Realty's first U.S. hyperscale fund is expected to fuel future growth with up to $10 billion in investments, leading to enhanced revenue and returns through fees, highlighting its significant potential impact on long-term earnings sustainability.
Increasing data center revenue, supported by robust leasing activity, renewal leases with fixed escalators, and a strategic focus on AI and cloud infrastructure demand, forecasts continued growth in adjusted EBITDA and FFO, enhancing profitability.
Strategic expansions in emerging and existing markets, such as the new development pipeline in Charlotte and Atlanta, align with Digital Realty's growth strategy, creating opportunities to capture diverse sources of revenue and improve net margins through scale efficiencies.
Digital Realty's commitment to sustainability, including initiatives like green data centers and 100% renewable energy coverage in key markets, can lead to cost savings and strengthen its position in the market, positively affecting net margins and earnings.

Digital Realty Trust Earnings and Revenue Growth

Digital Realty Trust Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

Analysts are assuming Digital Realty Trust's revenue will grow by 11.5% annually over the next 3 years.
Analysts assume that profit margins will shrink from 23.6% today to 13.2% in 3 years time.
Analysts expect earnings to reach $1.0 billion (and earnings per share of $3.07) by about August 2028, down from $1.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.3 billion in earnings, and the most bearish expecting $423 million.
In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 90.9x on those 2028 earnings, up from 43.1x today. This future PE is greater than the current PE for the US Specialized REITs industry at 28.5x.
Analysts expect the number of shares outstanding to grow by 4.17% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 7.35%, as per the Simply Wall St company report.

Digital Realty Trust Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

The rapid expansion and investments in Northern Virginia and other U.S. markets may lead to supply outpacing demand, which could impact future revenues and margins.
Elevated uncertainty and volatility in capital markets might affect financing costs and availability, potentially pressuring future earnings.
Fluctuations in interest rates could increase debt servicing costs, impacting the company's net margins and overall profitability.
Intensified competition from new market entrants and existing competitors could lead to price pressure, affecting revenue growth and net margins.
Potential delays in the decision-making process of customers, especially in enterprise and hyperscale segments, could slow leasing momentum and impact future revenue streams.

Valuation

How have all the factors above been brought together to estimate a fair value?

The analysts have a consensus price target of $195.44 for Digital Realty Trust based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $220.0, and the most bearish reporting a price target of just $140.0.
In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.9 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 90.9x, assuming you use a discount rate of 7.4%.
Given the current share price of $169.49, the analyst price target of $195.44 is 13.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

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Disclaimer

AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Record Leasing And Demand Trends Will Fuel Future Data Center Expansion