Expanding AI Solutions And Development Pipeline Will Strengthen Future Prospects

Key Takeaways

• Record leasing in key segments and expanded development pipeline signal robust future revenue growth.
  
• Strong liquidity and capital efficiency position Digital Realty for strategic expansion and enhanced earnings.
  
• Reliance on large capacity deals and tight data center supply may challenge revenue growth amid rising competition and potential regulatory changes.

Catalysts

Digital Realty brings companies and data together by delivering the full spectrum of data center, colocation, and interconnection solutions.

• Digital Realty's achievement of a second consecutive quarter of record leasing in the 0-1 megawatt plus interconnection segment indicates strong demand and execution in a key growth area, which is expected to boost revenue in the future.
  
• With over $6 billion in liquidity and reduced leverage, Digital Realty is well-positioned to fund development opportunities, accelerating the expansion of their portfolio and leading to potential increases in future revenue and earnings growth.
  
• Digital Realty has expanded its development pipeline by over 75%, with most projects being 70% pre-leased, which enhances revenue visibility and is likely to drive revenue growth in the coming years.
  
• The rollout of new products and services, such as high-density colocation and the expansion of AI-driven solutions, positions Digital Realty to capture emerging market opportunities, potentially increasing net margins due to higher-value offerings.
  
• Digital Realty's commitment to capital recycling and developing private capital partnerships is improving capital efficiency, which may enhance net margins and contribute to future earnings growth.

Digital Realty Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Digital Realty Trust's revenue will grow by 10.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.3% today to 10.0% in 3 years time.
• Analysts expect earnings to reach $736.2 million (and earnings per share of $2.26) by about March 2028, up from $561.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.7 billion in earnings, and the most bearish expecting $257.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 129.8x on those 2028 earnings, up from 89.4x today. This future PE is greater than the current PE for the US Specialized REITs industry at 29.4x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.62%, as per the Simply Wall St company report.

Digital Realty Trust Future Earnings Per Share Growth

Risks

• The company experienced short-term headwinds from capital recycling and leveraging diverse capital sources, which might continue to challenge near-term revenue and earnings growth.
  
• A Heavy reliance on large capacity block deals, which are subject to significant lumpiness and prolonged decision cycles, could pose a risk to consistent revenue visibility and earnings stability.
  
• The tight data center supply, especially in power availability and infrastructure components, may impede the company's ability to meet rapidly evolving customer demands and impact future revenue growth.
  
• Potential geopolitical and regulatory changes related to data center operations, like data sovereignty laws, could alter anticipated demand and affect future revenue streams and net margins.
  
• Increasing competition in the data center space, particularly from private capital-backed competitors who may push asset pricing, could compress development yields and impact Digital Realty's earnings and net margins.

Valuation

• The analysts have a consensus price target of $188.125 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 $113.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.3 billion, earnings will come to $736.2 million, and it would be trading on a PE ratio of 129.8x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of $149.17, the analyst price target of $188.12 is 20.7% higher.
  
• 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.