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.

Strong demand for data center capacity and strategic expansions position Digital Realty for future revenue growth and improved profitability.
Sustainability initiatives like green data centers and renewable energy use can enhance cost savings and market position.
Rapid expansion in U.S. markets risks oversupplying demand, facing competitive pressures and interest rate fluctuations impacting profitability and revenue growth.

Catalysts

About Digital Realty Trust

Digital Realty brings companies and data together by delivering the full spectrum of data center, colocation, and interconnection solutions.What are the underlying business or industry changes driving this perspective?

Digital Realty's record backlog of leases, which have not yet commenced, indicates strong future revenue potential and earnings growth due to steady demand for data center capacity, particularly from AI and cloud service providers.
The successful formation of Digital Realty's first U.S. hyperscale fund is expected to fuel future growth with up to $10 billion in investments, leading to enhanced revenue and returns through fees, highlighting its significant potential impact on long-term earnings sustainability.
Increasing data center revenue, supported by robust leasing activity, renewal leases with fixed escalators, and a strategic focus on AI and cloud infrastructure demand, forecasts continued growth in adjusted EBITDA and FFO, enhancing profitability.
Strategic expansions in emerging and existing markets, such as the new development pipeline in Charlotte and Atlanta, align with Digital Realty's growth strategy, creating opportunities to capture diverse sources of revenue and improve net margins through scale efficiencies.
Digital Realty's commitment to sustainability, including initiatives like green data centers and 100% renewable energy coverage in key markets, can lead to cost savings and strengthen its position in the market, positively affecting net margins and earnings.

Digital Realty Trust Earnings and Revenue Growth

Digital Realty Trust Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

Analysts are assuming Digital Realty Trust's revenue will grow by 11.5% annually over the next 3 years.
Analysts assume that profit margins will shrink from 23.6% today to 13.2% in 3 years time.
Analysts expect earnings to reach $1.0 billion (and earnings per share of $3.07) by about August 2028, down from $1.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.3 billion in earnings, and the most bearish expecting $423 million.
In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 90.9x on those 2028 earnings, up from 43.1x today. This future PE is greater than the current PE for the US Specialized REITs industry at 28.5x.
Analysts expect the number of shares outstanding to grow by 4.17% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 7.35%, as per the Simply Wall St company report.

Digital Realty Trust Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

The rapid expansion and investments in Northern Virginia and other U.S. markets may lead to supply outpacing demand, which could impact future revenues and margins.
Elevated uncertainty and volatility in capital markets might affect financing costs and availability, potentially pressuring future earnings.
Fluctuations in interest rates could increase debt servicing costs, impacting the company's net margins and overall profitability.
Intensified competition from new market entrants and existing competitors could lead to price pressure, affecting revenue growth and net margins.
Potential delays in the decision-making process of customers, especially in enterprise and hyperscale segments, could slow leasing momentum and impact future revenue streams.

Valuation

How have all the factors above been brought together to estimate a fair value?

The analysts have a consensus price target of $195.44 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 $140.0.
In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.9 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 90.9x, assuming you use a discount rate of 7.4%.
Given the current share price of $169.49, the analyst price target of $195.44 is 13.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
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.

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Disclaimer

AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Record Leasing And Demand Trends Will Fuel Future Data Center Expansion