Along with the rise of artificial intelligence has been the growth in data centers. The former has been directly responsible for the latter’s meteoric rise.

According to the National Telecommunications and Information Administration, there are approximately 5,000 data centers operating in the U.S. and their number is projected to increase by 9% annually through 2030. Much of the growth will come from hyperscalers, or cloud service providers operating at scale. The four largest hyperscale platforms in the world are Amazon’s (NASDAQ:AMZN) AWS, Alphabet’s (NASDAQ:GOOG) (NASDAQ:GOOGL) Google Cloud, Meta Platforms (NASDAQ:META), and Microsoft’s (NASDAQ:MSFT) Azure. Together, they represent 78% of total capacity.

While AI is driving their growth, there is a problem. Even as AI’s capabilities expand exponentially, approximately doubling every nine months, the cost of the technology is rising even faster. An Epoch AI researcher told Time magazine, “The cost of the largest AI training runs is growing by a factor of two to three per year since 2016.” By 2027, the cost to train the largest models will cost $1 billion or more.

Aside from training costs outstripping ability to pay, the AI’s energy demands are massive. A ChatGPT search query uses 10 times more power than a similar Google search. Generating an AI image consumes the equivalent of half of a smartphone’s total charge.

The International Energy Agency estimates AI’s growth will cause data centers total electricity consumption to hit over 1,000 terawatt-hours (TWh) in 2026, or “roughly equivalent to the electricity consumption of Japan.”

It is an unsustainable course the industry is on, which is why investors need to use caution when playing the space. The ability to keep growing will be inhibited by the ability to provide power, which may run into a wall unless more electric power plants are built. As a result, the two companies below are the best data center stocks to buy in October.

Key Points About This Article:

• Data centers have been one of the fastest-growing markets due to the proliferation of artificial intelligence and the demands of hyperscalers.
• Yet their growth has come at a cost in terms of energy consumption and efficiency, and may inhibit future growth, two things the data center stocks below seek to cure.
• If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.

Digital Realty Trust (DLR)

Real estate investment trust (REIT) Digital Realty Trust (NYSE:DLR) is the first data center stock to consider. It is one of the world’s largest REITs generally but is the biggest specializing in data centers. It owns over 300 properties and has more than 5,000 customers.

New bookings have been strong and rental rates are rapidly rising as AI increases demand. And when it suffers a vacancy, it is able to quickly backfill the opening. Digital Realty Trust is using the cash influx to improve its financial situation, paying down nearly $1 billion in debt during the quarter.

Digital Realty’s growth is benefiting from its broad geographical footprint. Going beyond a simple warehousing format, the REIT provides its global customers with a colocation model that offers space, power, security, and arguably most important, network connectivity. It is this latter part that makes it an attractive investment.

The colocation, or “colo,” model across virtually its entire portfolio hits the sweet spot of the data center market that is witnessing the fastest growth. While rival Equinix (NASDAQ:EQIX) has made a specialty out of catering to prominent hyperscalers, Digital Realty Trust offers its suite of advantages worldwide with a significant exposure to cloud providers.

DLR stock is up 66% since the AI boom began in earnest in late 2022 with the release of Chat GPT. Shares are up 20% in 2024. Wall Street has a buy rating on the stock that is enhance by its durable competitive advantages based on its scale of geographic diversity that minimizes the power crunch.

Vertiv Holdings (VRT)

AI and data center demand are hot, but they are creating a literal hotspot in the industry. As noted, data centers’ enormous power consumption due to AI are making liquid cooling solutions attractive, and Vertiv Holdings (NYSE:VRT) could be one of the biggest beneficiaries of this critical need.

Traditional air cooling methods fall short of data center thermal mitigation needs. Vertiv offers these sites coolant distribution units (CDUs) that manage the flow of coolant within the data center, ensuring optimal performance. It also offers direct-to-chip cooling technology, which means circulating coolant directly to the heat-generating components, such as CPUs and GPUs.

Vertiv is positioning itself as a key player in this emerging market against rivals like Eaton (NYSE:ETN). It is a market growing at double-digit rates and with a small number of players able to meet the burgeoning demand, it provides Vertiv with the ability to expand margins. 

VRT stock is attractively price relative to the competition, and Wall Street expects it to grow earnings 30% annually long term. Although the stock is up 85% year-to-date, it is 20% below its 52-week high. Considering the growth trajectory of the industry, Vertiv is a top data center stock to buy.

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