It was a case of guilt by association with Digital Realty Trust‘s (DLR -1.50%) shares on Thursday. The company took it on the chin in sympathy with a peer that was hit by a series of bearish analyst takes. This sent Digital Realty’s shares down, too, and the stock ended up closing the day 1.5% lower in value. By contrast, the benchmark S&P 500 index had a good trading session, rising by 0.8%.
Post-investor-day blues
That peer is Equinix, and that negative pundit reaction came in the wake of the company’s analyst day presentation.
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In that event, Equinix divulged that its adjusted funds from operations (AFFO) — widely considered the most crucial profitability metric for REITs — would take a hit in the near future. This is because there is currently heavy demand to quickly and substantially build out data center capacity.
In turn, that’s due to the considerable computing requirements of artificial intelligence (AI) functionalities. AI is in persistently high demand from a great many developers and users alike, as its successful implementation and usage could greatly help streamline a business’s operations.
Although Digital Realty is distinguishable from Equinix in a number of ways, it runs more or less the same type of business and leases similar facilities. So, the factors anticipated to negatively impact Equinix’s fundamentals are sure to affect Digital Realty’s numbers, too.
This felt like an overreaction
That’s understandable to a degree, but I don’t think long-term Digital Realty shareholders — a group that includes myself — should be discouraged by this development.
Data center demand is heavy and sure to stay that way, and it seems to me that the anticipated hits to AFFO will be largely short term in duration. Once the major build-outs occur, data sector real estate investment trusts (REITs) will be larger, more powerful, and better positioned for growth.
Eric Volkman has positions in Digital Realty Trust. The Motley Fool has positions in and recommends Digital Realty Trust and Equinix. The Motley Fool has a disclosure policy.
