As shares of stocks that provide the hardware, power, and connectivity for artificial intelligence data centers sold off Wednesday, one niche of data center stocks was holding up surprisingly well: the real estate companies that provide the land and power connections for data centers.
Shares of Digital Realty and Equinix rose modestly Wednesday, by 2.6% and 4%, respectively. After trading higher for much of the day, Csquare closed down by 0.6%.
That's in comparison to neoclouds like CoreWeave, which was down nearly 9%, and chip stocks such as Micron, which fell nearly 7%. Those stocks were falling on fears that Democratic wins in the midterm elections could cause development delays or moratoriums on data center projects.
It's a seemingly odd disconnect, as the fate of companies that build and provide the computing power for data centers would presumably align with that of the real estate firms that lay the foundations for them.
But investors are likely betting that development constraints will result in higher prices for the real estate firms, which in turn will increase profits. That's what BMO Capital Markets' Ari Klein argues in a note out Wednesday afternoon. "With sub-1% U.S. vacancy and demand far outpacing supply, development constraints should support pricing."
"In-development projects should move forward, though future projects face greater uncertainty," he adds.
Digital Realty has the most to gain, with around 1.5 gigawatts of data center capacity already under construction and another 8.4 gigawatts in future capacity. "We expect acquisitions in new markets to extend the growth runway and de-risk developments," he adds.
Equinix, which focuses on smaller sites with an estimated 40-to-60 megawatt capacity, is less risky, however, since smaller projects are less likely to be political targets. What's more, "its 48 projects across 20 countries limit single-project risk," Klein wrote.
Lastly, Csquare is "largely immune from potential development delays given its brownfield focus," he added.
Comments