It was a rough week for most artificial intelligence (AI) stocks last week. As revealed in several of last quarter’s earnings reports, not every investment in AI tech is paying off as soon or as much as hoped. Investors would be wise to rethink which of these names are actually must-haves.
However, if you think this recent reality check is going to slow the expansion of the industry, think again. This expansion is very much needed. Indeed, ARK Invest’s Cathie Wood believes the AI data center business is set to grow from $500 billion per year now to $1.4 trillion by 2030, jibing with an outlook from technology consulting outfit Gartner.
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These predictions, of course, can and should impact how investors plug into this fast-growing market. While hardware powerhouse Nvidia and decision-intelligence software specialist Palantir Technologies will still feature prominently in AI’s future, it’s the data center sliver of the business where you’ll find the industry’s top growth opportunities right now.
But these businesses are different from the typical hardware or software name. Real estate investment trusts (REITs) like Equinix(NASDAQ: EQIX) and Digital Realty Trust(NYSE: DLR) are arguably the best way to play AI’s second act. Here’s why.
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It’s an “anything goes” industry right now. Sometimes it makes sense to use third-party processor chips, for instance, while other times it’s better to design your own. Likewise, several technology giants that have experience building and operating their own data centers are still opting to use third-party AI data centers. Most access to AI data centers, in fact, is leased rather than owned, requiring recurring rent payments from their users.
And this preference raises an important question for investors: If the next slate of top AI investment opportunities is recurring income-oriented rather than growth-oriented (via one-off sales of hardware), what’s the optimal way of being in the business?
Not as a conventional company, as it turns out. Rather, real estate investment trusts — or REITs, for short — may offer the biggest and best ultimate bottom lines.
In simplest terms, REITs own portfolios of revenue-bearing real estate ranging from office buildings to hotels to apartment complexes to shopping malls and more. And this “more” can include cloud-based access to data center servers, storage, and AI computing platforms. All of these businesses, of course, enjoy reliable cash flow, which makes them well-suited for supporting sustained dividends.
REITs enjoy a structural tax advantage that even most ordinary dividend-paying companies don’t. That is, as long as a REIT distributes the majority of its profits to shareholders in the form of dividend payments, none of this profit is first taxed at the corporate level. With companies facing typical corporate tax rates of between 20% and 25%, this means REIT holders ultimately receive this much more value compared to similar investment options.
While they’re not the only data center operators to be structured as REITs, Digital Realty Trust and Equinix are two of the few players to be structured this way, however, and are certainly two of the biggest and most important such names.
Digital Realty Trust says it’s the world’s largest data center platform, and the claim isn’t difficult to believe. The company owns more than 300 different facilities in more than 50 cities serving over 5,000 customers, including the likes of software giant SAP and telecom powerhouse AT&T. It’s on pace to do a little over $6 billion worth of business this year and turn that into a per-share profit of roughly $3.60 versus 2024’s comparison of $1.61. Digital Realty has grown its top line for 20 consecutive years, proving that it can adapt to an ever-changing technology landscape. Newcomers will be stepping into a forward-looking dividend yield of right around 3%.
Equinix is sized similarly to Digital Realty Trust. Like its rival, the company is consistently profitable, supporting dividend payments that are expected to reach just over 2.3% of the stock’s current price in the year ahead. This REIT is somewhat different from Digital Realty by virtue of offering software-defined networking solutions for clients that may need to regularly update how their platform interconnects.
Whatever the case, analysts are firmly bullish on both names. The majority of analysts covering EQIX currently rate the stock as a strong buy, with a consensus target of $965 that’s 20% above the ticker’s present price. The analyst community also suggests DLR is undervalued by almost as much. That’s not a bad way to start out a long-term trade.
But what if you just don’t need income right now? What if you’d rather have the growth?
That’s just it. Although you’ll get the (taxable) income whether you want it or not, you’ll still experience most of the continued proliferation of AI data centers.
Equinix’s most recent dividend increase upped its per-share payment to the tune of 10%, for perspective. While Digital Realty Trust suspended its dividend growth back in 2023, so it could invest more in AI architecture at that critical time for the business, its revenue and earnings have continued to grow. Indeed, analysts are looking for 2025’s full-year revenue to be up 12% year over year once its fourth-quarter numbers are released, with comparable growth in the cards at least through 2028. Given the forecasts for the AI data center industry’s growth, both of these REITs are likely to see strong growth for far longer than that.
The trick here is redefining what an AI pick can and should look like.
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James Brumley has positions in AT&T. The Motley Fool has positions in and recommends Digital Realty Trust, Equinix, Nvidia, and Palantir Technologies. The Motley Fool recommends Gartner and SAP. The Motley Fool has a disclosure policy.
