Record Leasing Demand And Fortune 500 Exposure Will Drive Expansion

Key Takeaways

• Robust demand, limited new supply, and high replacement cost rents position Prologis for sustained rental growth and increased pricing power as market conditions normalize.
  
• Expansion in value-added services and exposure to e-commerce trends support revenue diversification and long-term earnings outperformance.
  
• Slower leasing, higher vacancies, reduced energy incentives, and elevated bad debt signal risks to revenue, NOI growth, and earnings momentum amid ongoing macro uncertainty.

Catalysts

Prologis, Inc., is the global leader in logistics real estate with a focus on high-barrier, high-growth markets.

• A record-high leasing pipeline up 19% year-on-year, growing demand from large customers, and a historic level of build-to-suit signings point to pent-up demand that is likely to translate to accelerated leasing activity and revenue growth as macro policy uncertainty dissipates.
  
• Trends in customer behavior-such as ongoing investments in supply chain resiliency and onshoring, evidenced by Fortune 500 clients making long-term, large-scale build-to-suit commitments-are expected to provide sustained demand for Prologis' well-located logistics assets, supporting occupancy and long-term rental rate growth.
  
• Limited new supply and a significant spread between market and replacement cost rents (over 20%) combined with a depleting development pipeline position Prologis for future periods of robust rent growth and improved net operating income as market vacancy normalizes and pricing power returns.
  
• The continued expansion in value-added services (like renewable/distributed energy solutions and data centers) further diversifies revenue streams and leverages long-term trends toward automation and electrification in warehouse operations, which is likely to provide incremental NOI and margin expansion opportunities.
  
• As e-commerce and last-mile delivery maintain secular growth, especially in densely populated urban centers, Prologis' global scale and high-barrier market exposure allow for premium pricing and higher occupancy, positioning the company for above-average revenue growth and long-term earnings outperformance.

Prologis Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Prologis's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 38.6% today to 37.3% in 3 years time.
• Analysts expect earnings to reach $3.5 billion (and earnings per share of $3.75) by about July 2028, up from $3.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $4.9 billion in earnings, and the most bearish expecting $3.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 40.2x on those 2028 earnings, up from 29.4x today. This future PE is greater than the current PE for the US Industrial REITs industry at 28.2x.
• Analysts expect the number of shares outstanding to grow by 0.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.79%, as per the Simply Wall St company report.

Prologis Future Earnings Per Share Growth

Risks

• Management notes that new leasing activity is slower than normal, with decision-making by tenants described as deliberate and cautious due to ongoing macro uncertainty-this persistence of delayed or deferred leasing poses a risk to sustained revenue and NOI growth if macro clarity does not materialize.
  
• Elevated market vacancy rates (currently 7.4%, well above recent cycle lows) and a subdued net absorption environment (with full-year projections of only 75-100 million sq ft) indicate normalization and could limit future pricing power and same-store rent growth, negatively impacting top-line revenue growth in the medium term.
  
• Management acknowledges that recent legislative changes in the U.S. will reduce incentives for energy projects (solar/storage) over time, which could diminish returns from Prologis' renewable energy initiatives and lessen expected diversification in operating income.
  
• Bad debt remains "elevated" at 35-40 basis points, almost double historical levels, and management notes particular vulnerability among larger users and certain sectors (like home-oriented retailers), suggesting credit loss risk may continue to weigh on net margins if economic conditions deteriorate.
  
• Forward guidance and comments point to a normalization (i.e., deceleration) of same-store NOI growth in the coming quarters (3.5% in the back half versus mid-5% in H1), largely due to less favorable comps and occupancy drag-this trend highlights earnings momentum risk if leasing or absorption does not accelerate as expected.

Valuation

• The analysts have a consensus price target of $119.15 for Prologis 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 $150.0, and the most bearish reporting a price target of just $95.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $9.5 billion, earnings will come to $3.5 billion, and it would be trading on a PE ratio of 40.2x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $109.19, the analyst price target of $119.15 is 8.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.