DLR: Continued Demand for Data Centers Will Drive Expansion Momentum

Analysts have raised their price target for Digital Realty Trust by approximately $1.48. This reflects renewed optimism after recent guidance boosts and continued strong demand in data center markets.

Analyst Commentary

Recent analyst reports feature both bullish and cautious perspectives on Digital Realty Trust, reflecting careful consideration of the company's growth prospects and valuations.

Bullish Takeaways

Bullish analysts have highlighted improved guidance and record demand pipelines, which signal strong momentum in core data center markets.
Increases in price targets reflect confidence in Digital Realty's predictable growth business model.
Analysts note the company’s valuation has become more attractive following sector consolidation, which makes it appealing for stable growth investors.
Strong customer engagement and continued interest from key markets such as Charlotte support expectations for future leasing activity and expansion.

Bearish Takeaways

Some analysts maintain a cautious outlook and keep Hold or Underweight ratings due to perceived downside risks.
Cautious analysts cite slightly weaker leasing activity in recent results, suggesting potential challenges in capturing new deals as quickly as anticipated.
Conservative viewpoints also point to adjustments in price targets that are more modest, which reflects ongoing scrutiny of the sector’s broader macro trends.

What's in the News

Digital Realty announced an expanded collaboration with NVIDIA to advance next-generation AI infrastructure at its Manassas, Northern Virginia campus. This initiative includes support for NVIDIA's AI Factory Research Center and the development of best practices in AI data center design. (Client Announcements)
The company raised its 2025 earnings guidance, increasing total revenue expectations to between $6.025 billion and $6.075 billion and net income per diluted share to between $3.57 and $3.62, up from previous projections. (Corporate Guidance, Raised)
A strategic partnership with Dell Technologies and DXC was unveiled to deliver integrated private AI infrastructure solutions. Customers will benefit from validated use cases, comprehensive deployment toolkits, and expert-led services to accelerate AI adoption. (Client Announcements)
Digital Realty introduced its data center innovation lab in Northern Virginia, providing partners and customers with a real-world environment to test AI and hybrid cloud deployments before full-scale implementation. The lab also fosters collaborative opportunities with industry leaders such as AMD, Cisco, Supermicro, and Vcinity. (Product-Related Announcements)

Valuation Changes

The Fair Value Estimate has increased modestly from $197.70 to $199.19 per share, signaling a positive adjustment.
The Discount Rate has risen slightly from 7.41% to 7.81%, reflecting a marginally higher risk assessment.
The Revenue Growth projection edged down from 13.16% to 12.95%, indicating a minor reduction in forward growth expectations.
The Net Profit Margin forecast decreased from 14.34% to 13.89%, suggesting a slightly lower profitability outlook.
The Future P/E Ratio is projected to rise from 75.69x to 81.35x, highlighting an expectation for a higher market valuation multiple going forward.

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.

How well do narratives help inform your perspective?

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