Data is the new gold rush. Data usage is growing exponentially as more companies digitize their businesses. It's driving them to invest heavily in digital infrastructure to leverage the power of data.
Data centers are a key piece of this puzzle. The world will need more of these facilities in the future to support the growth in data consumption as companies use it for more things, including artificial intelligence (AI) applications. Here's a closer look at what's driving the current data center investment cycle and how investors can capitalize on this megatrend.
A "once-in-a-generation" opportunity
Leading global infrastructure investor Brookfield Infrastructure (BIP -0.80%) (BIPC -1.04%) recently held its annual investor day. Digitalization was a key topic. One of the speakers, Felix Chan, laid out the case for data centers at that event. Chan stated:
We're in a once-in-a-generation investment cycle for data centers at the moment. We estimate that we will need over a trillion dollars over the next 10 years to invest in data centers to ensure that there is sufficient infrastructure for the growth in data consumption. In terms of megawatt capacity over the next three years, we estimate that an additional six gigawatts of capacity will be required to meet data demand.
As Chan points out, the world will need to invest over $100 million annually over the next decade to build additional data center capacity. That's a massive investment opportunity for companies focused on the space.
Another speaker at the event, Olivier Mitchell, highlighted the catalysts driving demand for data centers. Mitchell stated:
There are four major trends that are pushing the development of the data centers across the globe. The first one being the mass production of data. The second one is the exchange of the data. The third trend is the cloudification of the IT where everything is putting into the public cloud. And I would say the last trend we're seeing and we are actively working with our customers is the generative AI.
This quartet of catalysts is driving companies across all sectors to sign leases for more data capacity. That's enabling data center developers to move forward with new capacity expansions.
How to play that data center building boom
Brookfield Infrastructure has put itself in an excellent position to capitalize on the data center megatrend. The company started investing in the sector in 2019 by partnering with data center REIT Digital Realty (DLR 0.95%) to acquire South American data center platform Ascenty. It has since built a global data center platform through acquisition and organic expansion. It currently has operations in 17 countries across five continents. The company recently plugged two holes in its platform by agreeing to acquire European data center platform Data4 and North American developer Compass Datacenters.
Brookfield's investments have it primed for growth. It currently has 485 megawatts of operating data center capacity, which generates $30 million of annual funds from operations (FFO). Brookfield has a line-of-sight to grow its operational capacity to 1.7 gigawatts (GW) by 2026, which would increase the FFO from its data center platform to $135 million. Meanwhile, it sees a path to expand its capacity five-fold to 2.5 GW in the future without making any more acquisitions. The robust growth of Brookfield's data center platform should help create significant value for investors over the coming years.
Brookfield's data center partner in South America and India, Digital Realty, is also well-positioned to capitalize on the data center megatrend. The company currently owns over 300 data centers across 50 metro areas. The REIT has a vast development pipeline. It's investing $2.3 billion to $2.5 billion this year on capital projects. Meanwhile, it continues to secure more land to support future developments. Those investments will drive healthy FFO growth in the future, which, along with its dividend, should help power strong total returns.
Fellow data center REIT Equinix (EQIX -0.91%) is another excellent way to play that data center megatrend. The company currently has 250 data centers in 32 countries across five continents. It's investing heavily in that platform. It's targeting to spend $3 billion annually through 2027 to expand and maintain its platform. These investments should increase its revenue by 8% to 10% per year while boosting its adjusted FFO by 7% to 10% annually. That earnings growth should support 10% annual dividend per share increases for the REIT. That combination of earnings and income growth should help drive strong total returns for Equinix shareholders.
A massive growth tailwind
The world needs significantly more data center capacity over the next decade to support the exponential growth of data usage. That will enable data center operators like Brookfield Infrastructure, Digital Realty, and Equinix to significantly expand their capacity. Those investments should drive strong earnings growth, enabling these companies to increase their dividends. Those drivers should help them to produce robust total returns. This upside potential is why investors should consider adding a data center platform to their portfolios to capitalize on this megatrend.
