Over the past month or so, we've been bombarded with coronavirus vaccine data, and it's all been very positive. Few people expected the leading vaccine candidates to be over 90% effective with no major safety concerns. As a result, it looks like the world may be able to get back to normal sooner than many expected.
While this has been a positive catalyst for so-called "reopening" stocks like airlines, hotels, and retailers, just to name a few, it has also caused investors to pump the brakes on stocks that benefited from the stay-at-home economy we've been living through for much of 2020. One of these stocks is data center real estate investment trust Digital Realty Trust (NYSE:DLR), which is down by about 20% from its peak. Digital Realty is already one of the largest stock positions in my own portfolio, and I rarely add to already large investments just because shares drop, but this is one I might make an exception for.
Digital Realty certainly benefited from the stay-at-home economy
When you access an online-based software program, upload a video to your social media, or stream a movie, all of that data is stored in the cloud. But it isn't actually floating around in the air -- it all needs to physically live somewhere. And that's where data centers come in.
Data centers provide a secure and reliable environment for servers and other networking equipment. And as the pandemic started, the volume of data flowing around the world grew dramatically as millions were forced to work from home, learn from home, and access entertainment from home.
Throughout most of the pandemic, companies that own and operate data centers like Digital Realty Trust were some of the market's top performers, especially out of the real estate sector. At one point at the depth of the market crash in March, I checked my portfolio and Digital Realty was the only stock that was higher for the year.
The need for data is growing, pandemic or not
The key point investors need to know is that while the need for video conferencing, home fitness solutions, and other things that have helped get us through 2020 could certainly see demand fall (at least somewhat) in the post-pandemic world, the volume of data flowing around the world is a long-term trend with massive growth potential. While I'd be cautious about buying some of the high-flying tech stocks that have been 2020's biggest winners, I'm not at all worried about the data center industry.
Simply put, the number of connected devices around the world is growing rapidly, and the gradual wide-scale rollout of 5G and other technological advances will allow these devices to become more data-heavy over time. Just to name a few things that should drive data center demand going forward, the artificial intelligence industry is expected to grow from an $11 billion market in 2019 to $90 billion by 2025. Over the next three years, the volume of virtual and augmented reality devices sold is expected to grow to roughly 10 times their 2019 level, and these are extremely data-heavy.
Digital Realty is one of the largest players in the data center space and the largest in terms of how many data centers it owns. It has excellent credit quality and financial flexibility to pursue growth opportunities as they arise. And the company has a fantastic track record of delivering value for shareholders -- since its 2004 IPO, Digital Realty has produced average total returns of about 22% annualized for investors, more than doubling the performance of the S&P 500.
Buy the dip?
To be perfectly clear, I'm convinced that the drop in Digital Realty's stock price is a result of an investor rotation into "reopening" stocks, rather than any fears about data center demand going forward. With a discounted share price, strong history of dividend growth and excellent returns, and a massive market opportunity, Digital Realty is once again near the top of my buy list.