Despite the incredible growth of the need for data centers, which provide everything from cloud computing to streaming video, some on Wall Street have begun to lose their enthusiasm for it. The fact of the matter is that big technology companies like Amazon.com and Facebook are planning on massive capital expenditures in the arena for 2019, and many plan on increasing leased square footage.
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With these stocks cooling off some in the fourth quarter of 2018, some on Wall Street feel that growth will reaccelerate in 2019. SunTrust has a new report on the data center segment that is very bullish on the possibilities for this year and beyond. The report noted this:
We believe selected supplier commentary-inspired fears around data center investments and public data centers’ more conservative tone do not portend a secular shift, but rather a digestion period following a record leasing year. Our analysis suggests significant long-term growth expectations will require ~2x the capacity added over the next 5 years vs. the prior 5, while large internet/cloud service/social media company commentary highlights continued focus.
In addition, the SunTrust team feels that valuations at current levels are reasonable, with the top stocks trading at the low end of the range, which looks like 18 times estimated 2019 earnings. They also note that big tech will continue to invest in data center capabilities, and also said this as well:
On balance, we believe major cloud service providers’ fourth quarter 2018 earnings reports – i.e. Amazon, Alphabet, and Microsoft, – highlight continued focus on data center investments in order to sustain growth. Though difficult to precisely parse out, as comments regarding investments are generally inclusive of other non-data center spending, we generally believe company commentary refutes recent investor concerns emanating from negative news in the supply chain.
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Five data center stocks are rated Buy at SunTrust, and all make sense for growth and income portfolios.
CoreSite Realty
This company offers among the highest payouts to investors in the group. CoreSite Realty Corp. (NYSE: COR) delivers secure, reliable, high-performance data center and interconnection solutions to a growing customer ecosystem across eight key North American markets. More than 900 of the world’s leading enterprises, network operators, cloud providers and supporting service providers choose CoreSite to connect, protect and optimize their performance-sensitive data, applications and computing workloads.
CoreSite’s scalable, flexible solutions and more than 350 dedicated employees consistently deliver unmatched data center options — all of which leads to a best-in-class customer experience and lasting relationships.
CoreSite investors receive a very generous 4.33% distribution. The SunTrust price target for the shares is $120, while the Wall Street consensus target is $111.94. The stock closed on Tuesday at $101.61 a share.
CyrusOne
This is another top pick 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 900, 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 arena may be found in the smaller players in the space like CyrusOne. Its stock 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, and all are bullish reasons for buying the stock.
CyrusOne unitholders receive a 3.66% distribution. SunTrust has a $70 price objective, and the consensus target price is $60.71. The shares closed at $50.28 on Tuesday.
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Digital Realty Trust
This top data center company also is a solid play on the huge cloud and streaming content revolution. Digital Realty Trust Inc. (NYSE: DLR | DLR Price Prediction) 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, given that 8.39% of the market cap of the company is in institutional hands.
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. Lastly, they believe the stock is underweighted by active managers and could see an uptick if they started adding shares.
Investors are paid a 3.82% distribution. The $132 SunTrust price target is well above the $124.80 consensus target. Shares closed most recently at $113.14.
Equinix
This is one of the larger capitalization data center companies, as well as a top play for more conservative accounts. Equinix Inc. (NASDAQ: EQIX) provides data center services to protect and connect the information assets for the enterprises, financial services companies, and content and network providers primarily in the Americas, Europe, the Middle East, Africa and the Asia-Pacific.
The company provides colocation services and related offerings, including operations space, storage space, cabinets and power for customers colocation needs; interconnection services, comprising physical cross connect/direct interconnections, Equinix Internet Exchange, Equinix Cloud Exchange, Equinix Metro Connect and Internet connectivity services; and managed IT infrastructure services, including installation of customer equipment and cabling, as well as equipment rebooting and power cycling, card swapping and emergency equipment replacement services.
Investors are paid a 2.3% distribution. SunTrust has set its target price at $560. The consensus price objective is $487.09, and the shares closed at $429.92.
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QTS Realty Trust
This is another top pick data center REIT that could be a potential takeover target. QTS Realty Trust Inc. (NYSE: QTS) is a leading provider of secure, compliant data center solutions, hybrid cloud and fully managed services. Its integrated technology service platform of custom data center, colocation and cloud and managed services provides flexible, scalable, secure IT solutions for web and IT applications.
The company’s Critical Facilities Management (CFM) provides increased efficiency and greater performance for third-party data center owners and operators. QTS owns, operates or manages 24 data centers and supports more than 1,000 customers in North America, Europe and Asia-Pacific.
Investors in QTS Realty Trust are paid a large 4.2% distribution. The SunTrust price target is $55. The posted consensus target is $47.19, and the stock closed Tuesday at $42.01 per share.
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All these top data center stocks are very solid total return plays in an industry that shows no signs of slowing down. In addition, all have backed up from highs printed last year and are offering better entry points.
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