Digital Realty’s Strong Quarter Merits a New Look at Data-Center REIT

A Digital Realty data center in Herndon, Va., shown in July. (Leigh Vogel/Bloomberg)

Key Points

• Digital Realty reported third-quarter adjusted funds from operations of $1.89 per share, exceeding forecasts of $1.79.
• The company raised its 2025 adjusted FFO forecast to $7.32 to $7.38, up from $7.15 to $7.25 in July.
• J.P. Morgan increased Digital Realty’s target price to $210 from $200, citing sold-out 2026 capacity and robust 2027 pipeline.

Digital Realty Trust had a great quarter, so it may be time for investors to think again about the beaten-down data-center stock.

Shares of the real estate investment trust rallied nearly 3% to $180 on Friday, after Digital Realty reported third-quarter results that easily topped analysts’ estimates. Management raised its forecast of profit for the year.

The company reported third-quarter adjusted funds from operations—a REIT equivalent to operating earnings—of $1.89 a share, handily beating Wall Street forecasts for $1.79. It now expects 2025 adjusted FFO of $7.32 to $7.38, up from $7.15 to $7.25 in July.

Following the earnings news, J.P. Morgan raised its target price for the stock to $210 from $200, noting that Digital Realty had sold out its capacity for 2026, and that executives were talking to “top-tier” hyperscaler customers about 2027.

While no specific customers were named, hyperscalers are typically big-name tech companies with major cloud computing operations. Examples include Amazon Web Services and Microsoft’s Azure.

“Management noted the discussions with its top hyperscale customers are robust and leading to the largest pipeline on record,” wrote J.P. Morgan analyst Richard Choe.

Data-center REITs have been big beneficiaries of the AI craze. While the REITs typically don’t own the high-end chips that make large language models possible, they lease real estate that houses data centers and maintain their vital power and cooling infrastructure.

Digital Realty, which owns more than 300 data centers around the world, has a lot riding on AI hyperscalers. While the company has more than 5,000 customers, its top 10 account for more than a one-third of its total revenue, notes research company Morningstar.

By contrast, Equinix, another popular data-center REIT, is more diversified, with a bigger focus on providing IT infrastructure to businesses outside of AI. Equinix’s top 10 customers account for 17% of its revenue.

That makes Digital Realty something of a high-risk, high-reward AI play. Its shares were on a tear in 2023 and much of the next year, nearly doubling in value in that time. But they have struggled since hitting a record of more than $195 in November 2024.

One issue was the Federal Reserve’s decision to temporarily pause interest-rate cuts last December, which made Digital Realty’s $18 billion in debt loom larger in investors’ minds. But perhaps a bigger factor was the release of Deep Seek’s stripped-down AI model in January, which raised the prospect of an AI future with far less power demand than investors had thought.

Since then, concern about DeepSeek has faded and the Fed has resumed interest-rate cuts. Digital Realty has gained about 33% from its early April lows, though it has risen less than 2% on the year.

While the specific DeepSeek threat now seems overblown, the episode revealed a general sense of jitteriness about the uncertainty surrounding AI. Those concerns remain, and likely continue to weigh on Digital Realty.

The stock price doesn’t offer much room for error. The REIT trades at more than 23 times forward funds from operations, up from less than 14 times three years ago. By contrast, Equinix trades at 21 times and the Real Estate Select Sector SPDR , an exchange-traded fund that tracks the sector, sells for less than 18 times.

While risks remain, the latest quarter—and the strong demand for space in Digital Realty’s data centers—should give investors a measure of the certainty they crave.

Write to Ian Salisbury at ian.salisbury@barrons.com