Nvidia (NVDA 1.53%), a maker of high-power computer chips, is the poster child of the artificial intelligence (AI) revolution. Wall Street has pushed the stock sharply higher, as the AI opportunity currently seems unlimited. That enthusiasm probably won't last, if Wall Street history is any guide. Which is why you may be better off buying Digital Realty (DLR 0.19%) as your long-term AI play.
What does Digital Realty do?
Digital Realty is a real estate investment trust (REIT) that owns data centers. The business model is more complex than that of a traditional property-owning REIT, but the basic premise is the same. Digital Realty leases out space in its properties to tenants. That said, what gets housed in a data center is really just a lot of computers.
Image source: Getty Images.
This is important for artificial intelligence because AI is really just algotithms running on lots of compute power. Nvidia's chips run AI, but those chips have to live somewhere. That somewhere is usually a data center of some type. Digital Realty is increasingly leaning in to this developing niche, adopting technology that will make it easier for companies to house their AI tech in its properties.
There's more opportunity than you may think
While there's no telling what company will eventually lead the AI race, it is pretty clear that AI will have to live somewhere. Right now, investors think the winner is Nvidia, which is why the stock is up 750% over the last three years. By contrast, Digital Realty is "only" up about 55%. That's impressive, but it clearly isn't seeing the same enthusiasm as more direct AI plays.
NYSE: DLR
Key Data Points
Only, there's a longer-term picture here to consider. AI will always need to live somewhere, and each new AI-related customer increases cash flow, supporting Digital Realty's 2.7% yield and expanding its dividend-paying ability. That's step one.
However, many of the AI industry's leaders are building their own data centers. Digital Realty is a logical acquirer of those data centers if, perhaps when, the companies that built them look to sell. That's step two. And it means that, even if Wall Street sours on the AI trade, Digital Realty could still see years of growth ahead for its pick-and-shovel AI business.
To be fair, Digital Realty's stock price has handily outperformed the average REIT. So there's some AI hype built into the shares. However, if you look at the risk-versus-reward profile of AI stocks, it will likely appeal to more conservative investors who want to add some exposure to this odd sector.
