Digital Realty (DLR 1.50%) has been under tremendous pressure over the past year. Several headwinds have weighed on the data center operator, causing its stock to plunge more than 30% in the last 12 months. That sell-off has pushed Digital Realty's dividend yield up over 5%.
While the data center REIT is currently facing stiff headwinds from foreign exchange fluctuations, higher interest rates, and balance sheet issues, it expects even stronger tailwinds to prevail over the longer term. One of those catalysts is artificial intelligence (AI), which Digital Reality believes will soon emerge as a robust demand driver for data center capacity. Here's why it's growing excited about the role it could play in helping power the AI revolution.
An emerging growth tailwind
Digital Realty CEO Andy Power stated on the company's first-quarter conference call: "Data centers support the growth and evolution of technology that is improving our standard of living, productivity, and the overall quality of our lives." The current digital transformation trend that's seeing businesses bring more of their processes into the cloud is driving robust demand for data centers. While capital spending is slowing due to concerns about an economic downturn, Digital Realty isn't experiencing any pullback in demand.
Power then noted that he expects AI will soon emerge as another long-term catalyst for data center demand. The company is already starting to see some AI-powered growth. For example, Powers mentioned on the call: "One of the largest public power companies in the U.S. and a new logo for Digital Realty is leveraging PlatformDIGITAL to modernize its infrastructure with network and control hubs. This company is modernizing its infrastructure to embrace AI, improve analytics, and provide data to its B2B customers."
It's one of many current and future customers that will need capacity in data centers to support continued digital transformation and the ability to leverage the power of AI.
A long-term demand driver
Power also provided his view of how AI will impact data center demand in the future. First, he addressed a common misconception. The CEO stated, "I think a misnomer here is that, in my opinion, everyone thinks every data center is going to turn into one that's going to be supporting artificial intelligence." On the one hand, AI use cases, applications, and workloads exist today that will thrive in the current infrastructure operated by Digital Realty and others because they have the power and cooling environments required to handle them.
However, Powers noted that "the bigger picture around AI is that this is an incremental major wave of long-term demand that will certainly need to have proximity to the major data that sits today." Power believes that AI will power another wave of demand for data center capacity at a time when it's still capitalizing on the wave of growth from digital transformation. That will provide it with dual growth tailwinds.
Digital Realty's management team believes the company is in an excellent position to capitalize on this demand because many AI-related companies work with it to test new technology. Because of that, the company can more easily evolve its infrastructure to meet the sector's needs in the future.
Another growth wave is on the horizon
Digital transformation is driving robust demand for capacity in Digital Realty's data centers. It believes AI will soon become another growth catalyst. In addition to driving incremental demand in its existing data centers, AI will likely power a new development wave. Because of that, the REIT's growth rate could reaccelerate in the future, making it a potentially intriguing way to play the growth in AI.
