Artificial intelligence has rapidly evolved from a technological buzzword to a transformative force across industries. This rapid advancement has generated substantial wealth for investors and ignited a surge in demand for the underlying infrastructure supporting AI applications.
Data centers, the critical backbone of AI operations, are at the forefront of this burgeoning market. The U.S. data centers are poised for explosive growth, with projections indicating a doubling of data center demand by 2030.
This escalating demand is underscored by a recent Goldman Sachs report estimating a $50 billion investment requirement to meet the increased power needs of US data centers alone by 2030.
Given the immense growth potential within the data center sector, this blog highlights six top-rated stocks well-positioned to capitalize on this megatrend.
Contents
Understanding Data Centers
Data centers serve as the digital economy’s critical infrastructure, housing the computational resources for processing, storing, and distributing data. As the backbone of cloud computing and artificial intelligence, their importance to businesses and organizations cannot be overstated.
Why Are Data Center Stocks Booming?
The escalating demand for cloud services and AI applications has propelled the data center industry into a period of rapid growth. This surge has driven valuations for semiconductor manufacturers, such as Nvidia and AMD, and leading cloud service providers – Amazon, Microsoft, and Google.
Investment bank UBS projects a substantial 15-20% expansion of the data center sector this year. While the broader industry enjoys significant investor interest, dedicated data center stocks have yet to fully reflect this growth trajectory.
Top Performing Data Center Stocks
Investing in data center stocks offers a promising avenue for long-term growth as the demand for digital infrastructure surges.
Let’s look into the top data center stocks for long-term growth:
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Equinix, Inc. (NASDAQ: EQIX)
Equinix, a global leader in data center colocation and interconnection, continues to excel financially. Its core business of leasing server space and providing high-speed internet connections drives strong revenue growth.
The company reported revenue growth every quarter for the past 22 years, with 2023 figures reaching $8.19 billion and AFFO per share at $32.11. The year 2024 forecasts indicate further growth, with revenue expected between $8.79 billion and $8.89 billion and AFFO per share between $34.48 and $35.51.
Strategic expansion through new data centers, partnership with Nvidia turnkey AI solutions for businesses, and acquisitions position Equinix for continued growth.
Equinix demonstrates a commitment to shareholders through consistent dividend increases, with a $4.26 per share quarterly dividend in 2024.
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Micron Technology, Inc. (NASDAQ: MU)
Micron Technology (MU) is a prominent player in the data center sector, specializing in manufacturing advanced data storage semiconductors. The company has demonstrated a solid commitment to innovation, as evidenced by the launch of the industry’s first quad-port SSD and the world’s most compact UFS 4.0.
Strategic partnerships with industry leaders, such as collaborating with NVIDIA for HBM3E production, further solidify Micron’s position in the market.
Micron delivered strong Q3 results in 2024, with revenue surging 81.5% YoY to $6.81 billion. With robust earnings growth projections for fiscal 2024 and 2025, MU presents an attractive investment opportunity for investors seeking exposure to the data center ecosystem.
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Arista Networks Inc(NYSE: ANET)
Arista Networks, a cloud networking leader with over 8,000 clients, launched Arista Etherlink to handle AI-driven network demands. The platform, based on Arista’s EOS, offers 800-gigabyte systems and line cards to combat AI congestion.
Fueled by AI, Arista’s revenue surged 33.8% to $5.86 billion in 2023, with Microsoft and Meta contributing 40%. Arista Networks delivered strong Q2 2024 results, demonstrating a powerful blend of growth and profitability.
Revenue surged 15.9% year-over-year to $1.690 billion, marking a 7.6% sequential increase.
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Microchip Technology Incorporated (NASDAQ: MCHP)
Microchip Technology boasts a significantly higher Return on Equity (ROE) than the industry average of 15%. This exceptional performance underscores the company’s efficient capital utilization and strong profitability.
Consequently, Microchip’s substantial 40% net income growth over the past five years is unsurprising. Moreover, this growth rate significantly outpaces the industry average of 31%, highlighting the company’s superior financial performance.
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Digital Realty Trust, Inc.(DLR:NYSE)
Digital Realty is the world’s largest cloud and carrier-neutral data center REIT, providing colocation and interconnection services globally. Recently selected to host a powerful AI supercomputer, the company benefits from a record backlog and strong lease renewals.
Last year, revenue grew 16.7% to $5.48 billion, and FFO per share increased 5.6%. While core FFO per share dipped slightly, the company forecasts 2% revenue growth and a 1.2% increase in core FFO per share this year. After a 17-year streak of dividend hikes, Digital Realty maintained its quarterly dividend at $1.22, yielding approximately 3.42%.
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Vertiv Holdings Co(NYSE: VRT)
Vertiv, a data center equipment provider, has seen explosive growth since its 2020 SPAC merger. Driven by soaring sales of critical infrastructure solutions, the company’s net income has jumped over 774% in the past five quarters.
With $5.4 billion in revenue and $1.19 EPS in 2023, Vertiv is on track for even stronger performance in 2024, forecasting up to $7.66 billion in sales and $2.26 adjusted EPS. Despite its B2B focus, investor enthusiasm is evident, with the stock up 555% since its IPO.
Start Investing in Data Center Stocks
The global data center market is poised for explosive growth. According to Prescient & Strategic Intelligence, it is expected to surge from $301.8 billion in 2023 to over $622.4 billion by 2030, and the market is projected to expand at a robust CAGR of 10.5%.
Investing in data center stocks offers a compelling opportunity for long-term growth, given the increasing demand for digital infrastructure. When considering investments, it’s essential to conduct thorough research, evaluate each company’s financial performance, and assess market trends.
Conclusion
Data center stocks might seem pricey, but their valuations could be undervalued given the sector’s robust growth trajectory. While much of the investment spotlight has been on AI-focused companies, the underlying demand for data center infrastructure is undeniable.
The surge in big data, rapid AI adoption, and the increasing reliance on supercomputing are powerful tailwinds propelling the industry forward.
As a result, investors may want to consider adding data center stocks to their portfolios before valuations fully reflect the sector’s long-term growth potential.
