Digital Realty (NYSE: DLR) stock price has staged a strong comeback this year and is hovering near its highest point on record. It has soared by almost 100% from its lowest point in 2023, bringing its market cap to over $53 billion.
DLR has risen by almost 20% this year, outperforming other data center REITs like CyrusOne and Equinix. It has also done better than other companies in the REIT industry like Realty Income and VICI Properties.
Data center demand is rising
Digital Realty is one of the biggest players in the data center industry, where it provides the buildings used by large technology companies. Some of the most notable data center players are firms like Amazon, Microsoft, IBM, and Google.
Instead of building or buying their data center buildings, these firms typically lease them from real estate companies and pay monthly rents. This happens because these firms have the scale that is needed to operate data centers globally.
In the case of Digital Realty, the company has a presence in five continents and 25 countries. It also has over 300 data centers, which it offers to over 5,000 of companies.
Digital Realty and other data center REITS like Iron Mountain have been in the spotlight this year because of the ongoing demand for data centers because of artificial intelligence. Altogether, analysts expect that large firms will continue investing over $1 trillion in data center as data demand rises.
This growth explains why a company like Nvidia has become a $3 trillion organization while OpenAI has achieved $150 billion valuation in the private market.
Digital Realty has grown over the years through acquisitions. In 2015, it acquired telx followed by companies like DuPont Fabros, Ascenty, Interxion, and Teraco, which has helped it to grow in more metros.
Digital Realty income statement and balance sheet
DLR has been in a strong growth in the past few years, helped by the rising demand for data and acquisitions. Its annual revenue has jumped from over $3.2 billion in 2019 to over $5.4 billion last year.
Its funds from operations (FFO) figure has jumped from $1.43 billion to $1.91 billion in 2023 and $1.92 billion in the last twelve months. FFO is an important metric for REITs because it provides a more accurate measure of their operational performance. It excludes non-cash depreciation and focuses on core operations.
The most recent financial results show that Digital Realty’s revenue came in at $1.4 billion in the second quarter, a 2% increase from Q1 and a 1% drop from the same quarter in 2023. Its net income was $75 million while its EBITDA rose by 2% to over $727 million.
Most importantly, Digital Realty’s FFO per share was $1.57, up from $1.52 in Q2’23 while core FFO dropped to $1.65 from $1.68.
Analysts expect that Digital Realty’s revenue will be $5.57 billion this year, a 1.8% increase from the same period in 2023. For 2025, its annual revenue will be about $6 billion.
Valuation and dividends
Digital Realty and other REITs are invested in because of their dividends. In its case, the company has a dividend yield of 3%, which is lower than most REITs. The small yield is because of the company’s strong stock performance over the years.
Digital Realty has not boosted its dividend payouts in the last two financial years. It paid a dividend of $4.88 in the last two years straight years. On the positive side, the company will likely boost its payouts in the future.
In addition to a frozen dividend, there is a risk that the company is highly overvalued because of its exposure in the data center industry.
Digital realty has a price-to-AFFO ratio of 27, much higher than the sector median of 16. Its forward P/AFFO has moved to 25, higher than the industry’s median of 17. Therefore, it needs to grow its revenue and profitability to justify the valuation multiples.
Digital Realty stock price analysis
The weekly chart shows that the DLR share price has been in a strong bull run in the past few months. It bottomed at $79.23 in 2023 and has rebounded to $157 today.
Most recently, the stock formed an ascending channel pattern shown in blue. It also remains a few points below the key resistance point at $160, its highest swing in 2022.
Digital Realty has remained above the 50-day and 200-week moving averages, which made a bullish crossover in November last year. In most periods, this pattern is one of the most bullish signs in the market.
Therefore, the stock needs to move above the resistance point at $160 to continue the uptrend. If this happens, it will likely retreat and retest the lower side of the rising channel at $150.
The post Digital Realty stock is severely overvalued; sits at a key resistance appeared first on Invezz