Data Center Stocks Deliver Strong Growth by Marrying Tech and Real Estate

In this clip from "Real Talk" on Motley Fool Live, recorded on March 25, Motley Fool contributors Matthew DiLallo and Tyler Crowe discuss why investors should manage their expectations if getting into the data center space and talk about the differences investors can expect with these stocks in comparison to high-growth tech stocks.

Matthew DiLallo: I think you need to look at data centers as a way to play the technology infrastructure boom using real estate. Of course, we've seen a lot of volatility in the sector which I wouldn't have expected to see as much of the volatility going from the tech stocks into this because you're dealing with fairly stable contracts and you're dealing with a long-term tailwind of a growth business. It's really how you're going to play. Instead of investing in Meta (META 0.21%) stock or Amazon (AMZN -0.42%), it's just a way to get into this without that technology exposure. It's different from other real estate stocks in the sense of the growth that you're going to see. I believe these are three to five year contracts versus office and net lease, which can be 10 to 25 years so there's a little more upside potential as demand grows for these types of properties. We see growth in multi-family. There's development but there's so much happening with digital transformation and all the data that's going on, we need so much capacity. Like Brookfield Infrastructure (BIP -2.10%), they have mentioned that there's 100-year super cycle in data infrastructure. It's going to be cycle after cycle of building new capacity for data centers, cell towers, small cells, fiber optic. There's just so much investment that's needed in this sector. It's like your way to be a growth investor in real estate versus other types, which is more of like a dividend cash flow type business. You do get that with data centers, but it's just so much more upside than the other types of properties.

Tyler Crowe: I would say, if there's a con to going into the data center, I guess there's the nuances of data and computing power is maybe one thing. Typically, when you do a contract in data centers, it's on a megawatt basis basically, how much power you consume. Over the years, the price per megawatt has gone down just simply because computing power has gotten better. What ends up happening is that companies need to offset the price per megawatt going down by stuffing more megawatts per square foot into that business. That's where there's a little bit of reinvestment that comes involved and can eat away a little bit over the long term. But, like you said, with reinvestment and things like that, they can typically offset that. The other thing I would just say is, manage your expectations just a little bit. As you were saying, they're very steady growers and there's a lot of growth runway, but we're talking about companies that grow revenue 9%, 10% a year is a pretty good year. You're not going to get into a tech growth stock that you're going to see 40% revenue growth, earnings growth, things like that. These are the tortoises of the tech world. In doing so, don't get discouraged when you only see 10% growth because these companies have been great wealth creators over the long term with dividends, with just slow and steady performance that just tends to out-grind, outperform the markets just because it's consistent. If you're looking on a long-term time horizon and are willing to overlook what looks like tepid growth compared to the tech sector, it's going to work to your advantage.