2 Top Data Center Stocks to Buy

Top Data Center Stocks to Buy: With technology now impacting every aspect of day-to-day life, data storage and computing power are at a larger premium than ever before.
For this reason, investors are increasingly looking at data centers and the businesses that support them as profitable investments.
But which data center stocks are best?

Super Micro Computer

Super Micro Computer (NASDAQ:SMCI) is a server manufacturer that provides hardware and services to data centers.
One of the unique aspects of Super Micro Computer that could make it a major winner in the coming years is its energy-efficient approach to mass computing.
With AI, machine learning and other computationally intensive technologies being widely adopted by businesses, data centers require more energy than ever before. This translates into higher operating costs that are ultimately passed on to customers.

Super Micro, however, has developed energy-efficient servers and more efficient cooling technologies. As a result, the company is almost uniquely positioned to offer favorable pricing as demand for computing power increases.
In the most recent quarter, Super Micro reported $1.64 billion in net sales, rising sequentially from $1.36 billion and $1.07 billion in the same quarter last year. Earnings grew explosively, rising from $39 million last year to $141 million. Gross margin rose to 17.6 percent, up from 15.5 percent in the previous quarter.
Super Micro has also proven its ability to defy market gravity this year, rising nearly 40 percent YTD as other tech stocks have struggled. Even with this surge in value, the stock still appears to have room to run over the next year.
The 12-month median price target for Super Micro Computer is $94, a 54 percent increase from the current price of $60.81. While only four analysts have offered ratings on the stock, the unanimous consensus from those analysts is that Super Micro is a buy.
The company’s valuation metrics are also fairly encouraging. Super Micro Computer trades at 8.71 times its forward earnings and just 0.66 times its sales. Given the five-year expected growth rate of 10 percent annually, which could easily be a low estimate, these metrics leave Super Micro looking quite attractive.
It’s also worth noting that Super Micro’s balance sheet is very strong. With a debt-to-equity ratio of just 0.10, the company carries minimal debt-related risks. The company also has approximately $247 million in cash on hand, giving it ample cushion against unexpected downturns and the ability to invest freely as new opportunities arise.
Between servicing a growing market niche, delivering excellent growth and maintaining a strong financial position, Super Micro Computer has all the elements of a stock to hold for the long run.
As AI applications continue to increase energy strain on data centers, Super Micro’s more energy-efficient server solutions should remain in high demand.

Digital Realty Trust

Digital Realty Trust (NYSE:DLR) is a real estate investment trust specializing in data centers. Due to demand for computing and storage capacity, companies that own large amounts of data center real estate are in an excellent position to prosper from new technological developments.
One of the main benefits of Digital Realty Trust is its ability to capitalize on digital transformation globally. The trust currently has data centers on six continents, giving it widespread exposure to both mature and emerging markets.
Once new technologies such as autonomous vehicles and 5G networks become widespread, demand for data storage is likely to surge worldwide.

In Q2, Digital Realty Trust reported core funds from operations (FFO) of $1.72 per share, up from $1.54 the year before.
Other metrics, however, weren’t quite as favorable. Net income, for instance, dropped to $0.19 per share, compared with $0.45 a year earlier. New bookings offered a bright spot in the report. The company’s new leases are expected to generate $113 million annually in revenue, a figure that could help to improve FFO and earnings.
While not quite as high as Super Micro Computer’s, it appears that Digital Realty Trust could have a market-beating upside over the next 12 months. The median price target for DLR is $152, giving it a 35.8 percent upside over the current price of $111.82. Much of this gain will be a rebound, as the stock has lost value this year. Because of its growing FFO and potential for future rental incomes, though, there’s good reason to believe that Digital Realty has room to grow beyond this rebound.
As a REIT, Digital Realty also offers the benefit of a larger-than-average dividend yield. The forward yield for this stock is 4.37 percent, resulting in an annual payout of $4.88 per share.
Over the last 10 years, this payout has grown at a steady but respectable rate of 5.32 percent annually. As such, Digital Realty Trust could be a good choice for investors looking for a combination of technology exposure and income.
Unlike Super Micro, however, Digital Realty Trust has largely followed the broader technology market in losses this year. The stock is down over 36 percent YTD. This has left the stock looking reasonably attractive from a valuation perspective. With a current P/E ratio of 17.75, the stock is trading far below its recent average range. The last time the stock traded at such a favorable multiple to earnings was 2014, suggesting that it is currently undervalued.
In the coming years, Digital Realty Trust may not grow as quickly as other tech-focused stocks. The stability and income that come from real estate exposure, however, provide an offset to this slower growth rate. Even with this slower growth, however, Digital Realty Trust should be able to continue increasing its funds from operations and its dividend.
Steady demand for data centers is unlikely to abate anytime soon, and Digital Realty’s status as a large, established player in this space should provide it with a moat against potential competitors.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.