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

Analysts have modestly trimmed their price target on Digital Realty Trust to about $198 from roughly $199, reflecting a slightly higher discount rate and marginally lower growth and margin assumptions, even as they point to attractive valuation, stable data center demand, and a record demand pipeline supporting long-term, predictable growth.

Analyst Commentary

Recent Street research reflects a generally constructive stance on Digital Realty Trust, with bullish analysts highlighting improving fundamentals and an increasingly supportive demand backdrop for data centers, while more cautious views focus on execution risk and the sustainability of growth at current valuation levels.

Bullish Takeaways

• Bullish analysts point to price target increases following upside quarterly results and raised guidance, indicating growing confidence in the company’s earnings power and visibility into 2025 cash flows.
• The record demand pipeline and strong customer engagement in key markets are seen as reinforcing the durability of Digital Realty’s growth profile, supporting a premium valuation for a stable, infrastructure-like business.
• Digital Realty’s predictable, contracted revenue base and less employment-sensitive demand drivers are viewed as defensive attributes, particularly as broader macro trends and cyclical sectors show signs of slowing.
• Some analysts characterize the recent share price consolidation as an opportunity, arguing that the current valuation better reflects a steady growth company with potential upside as execution remains solid and leasing trends normalize.

Bearish Takeaways

• Bearish analysts maintain more neutral stances despite lifting price targets, citing a balanced risk-reward profile where much of the near-term improvement in guidance and fundamentals may already be reflected in the stock.
• There is caution around slightly softer leasing metrics in the recent quarter, with concerns that any sustained slowdown in signings could weigh on future growth and limit multiple expansion.
• Some investors remain focused on execution risk around converting the current demand pipeline into signed, profitable deals, particularly in competitive markets and as larger customers negotiate aggressively on pricing and terms.
• Given the recent rally in data center peers, there is ongoing debate about whether Digital Realty’s valuation fully discounts potential macro headwinds or a moderation in sector growth, which could pressure returns if expectations prove too optimistic.

What's in the News

• Two large Digital Realty and Stack Infrastructure data centers in Santa Clara, California may sit empty for years as they await sufficient power from the local utility, highlighting energy grid constraints in Nvidia's hometown (Bloomberg)
• Digital Realty expanded its collaboration with NVIDIA at its Manassas, Northern Virginia campus, which is home to NVIDIA's new AI Factory Research Center, to advance next generation AI infrastructure, liquid cooling, and energy efficient power management standards (company announcement)
• The company raised its 2025 guidance and now expects total revenue of $6.025 billion to $6.075 billion and net income per diluted share of $3.57 to $3.62, reflecting stronger demand and visibility (company guidance)
• Digital Realty announced a strategic collaboration with Dell Technologies and DXC to deploy the Dell AI Factory on PlatformDIGITAL, offering validated private AI use cases and end to end implementation and operations services to accelerate enterprise AI adoption (company announcement)

Valuation Changes

• Fair Value: Trimmed slightly to about $197.78 from roughly $199.22, reflecting modestly more conservative assumptions.
• Discount Rate: Risen marginally to approximately 7.87 percent from about 7.82 percent, indicating a slightly higher required return.
• Revenue Growth: Edged down slightly to around 12.95 percent from roughly 12.98 percent, implying a modestly slower growth outlook.
• Net Profit Margin: Reduced slightly to about 13.86 percent from approximately 13.92 percent, signaling a minor softening in margin expectations.
• Future P/E: Eased marginally to roughly 77.46x from about 77.52x, consistent with the small downward adjustment in fair value.