DLR: Record AI Demand Pipeline Will Drive Upside Despite Power Constraints

Analysts nudged their fair value estimate for Digital Realty Trust slightly higher to approximately $199.22 from about $199.19, citing recent price target increases and upgrades that highlight the stock's attractive valuation, stable growth profile, and strengthening demand pipeline.

Analyst Commentary

Recent Street research reflects a generally constructive stance on Digital Realty Trust, with price targets moving higher and ratings shifting into more positive territory as analysts reassess the company’s growth durability and demand backdrop.

Bullish Takeaways

• Bullish analysts highlight that the recent consolidation in the share price has created a more compelling entry point for a stable growth company, supporting higher fair value estimates.
• Upside in the latest quarterly results and an increase in full year guidance are viewed as evidence that management is executing well against its growth plan, even amid a mixed macro environment.
• A record demand pipeline and strong customer engagement, including in key markets like Charlotte, underpin confidence in multiyear leasing momentum and cash flow visibility.
• The predictable, less employment-sensitive nature of data center demand is seen as a structural advantage, helping to support premium valuation multiples relative to more cyclical real estate segments.

Bearish Takeaways

• Bearish analysts point to slight downside in recent leasing metrics as a reminder that translating robust pipelines into signed deals and cash flows may prove uneven from quarter to quarter.
• Some remain cautious that, following the recent rerating, further multiple expansion could be limited without a sustained acceleration in leasing and development returns.
• There is concern that slowing macro trends could still weigh on certain customer verticals, raising the bar for management to maintain the current growth trajectory and justify higher price targets.
• Execution risk around delivering on raised guidance and scaling new capacity efficiently is cited as a key factor that could pressure valuation if performance falls short of elevated expectations.

What's in the News

• Two major Digital Realty and Stack Infrastructure data centers in Santa Clara, California remain built but unpowered, with local utility constraints expected to delay energization for years (Bloomberg)
• Expanded collaboration with NVIDIA at Digital Realty's Manassas, Virginia campus to advance next generation AI infrastructure, including an AI Factory Research Center, liquid cooling, and innovative power and efficiency approaches
• Raised 2025 guidance, with total revenue now expected between $6.025 billion and $6.075 billion and net income per diluted share guided to $3.57 to $3.62
• New three way collaboration with Dell Technologies and DXC to deploy Dell AI Factory on Digital Realty's PlatformDIGITAL, offering validated private AI use cases and end to end implementation and management for enterprise customers
• Launch of the Digital Realty Innovation Lab in Northern Virginia, a live data center test environment for AI and hybrid cloud workloads, featuring partners such as AMD, Cisco, Supermicro, and Vcinity

Valuation Changes

• Fair Value Estimate has risen slightly to approximately $199.22 from about $199.19 per share, reflecting a marginally more constructive long term outlook.
• Discount Rate has fallen slightly to roughly 7.82% from about 7.83%, modestly lowering the hurdle rate applied to future cash flows.
• Revenue Growth Forecast has increased slightly to around 12.98% from roughly 12.96%, indicating a marginally stronger top line growth expectation.
• Net Profit Margin Outlook has edged down slightly to about 13.92% from roughly 13.93%, suggesting a near unchanged but fractionally lower profitability profile.
• Future P/E Multiple has declined very slightly to approximately 77.52x from about 77.52x previously, leaving the long term valuation multiple essentially unchanged.