Digital Realty Trust (NYSE: DLR) is a non-tech stock that tech investors can understand. Its data centers play a critical role in supporting the burgeoning cloud computing industry.
Nonetheless, since it is a data center REIT, it is actually a real estate stock. That arguably makes it an excellent fit for a tech portfolio. Here's why.
Digital Realty described
Data centers like the ones owned by Digital Realty differ from other property types because they offer physical security, climate control, robust electrical systems, and redundant equipment.
Despite that fact, the expansion of the cloud computing industry drives its fundamentals. Grand View Research forecasts a compound annual growth rate of 14% through 2030 in the cloud infrastructure space. And Bloomberg predicts a 10% compound annual growth rate for the data center industry over the same period.
With over 300 data centers located in more than 50 metropolitan areas around the world, Digital Realty is in a solid position to meet the data center needs of a diverse group of global clients. Meta Platforms, Oracle, and Verizon are among its largest customers.
Amid rising demand for cloud capacity, Digital Realty continues adding properties. Currently, it has about $4.6 billion worth of projects under construction. However, Digital Realty is having to finance these projects in a high-interest-rate environment. That will inevitably lead to higher costs as the company expands and refinances debt.
Financial advantages
Still, its status as a real estate business gives it a level of stability not found in most tech stocks. It earned $2.7 billion in revenue in the first six months of 2023, a 19% increase from the same period a year earlier.
Although it took a hit due to a massive increase in utility expenses, it avoided a loss from the extinguishment of debt it suffered last year. Consequently, it reported a net income of $184 million in the first half of 2023, a 30% increase year over year.
Still, the metric that really counts for REITs is funds from operations (FFO), the preferred measure of their free cash flow. For the first half of 2023, that came in at $951 million.
Investors should remember that these companies must distribute at least 90% of their net income annually via dividends to maintain their tax-advantaged REIT status. This means the dividend will almost certainly continue as long as Digital Realty is profitable. With the company now paying $4.88 per share annually, at its current share price, it sports a dividend yield topping 4%.
Additionally, its steady growth helped drive the stock higher by almost 30% over the last year.
Admittedly, that may not sway investors who see its recent price-to-earnings ratio of 92. Still, given that FFO is the more important metric, investors should note that its price-to-FFO ratio is just 19. Based on that metric, Digital Realty looks more like a bargain stock.
Consider Digital Realty
Given that valuation and its growth, Digital Realty should remain a profitable investment. High rates may become a headwind for the company, but they are unlikely to significantly impede the growing demand for data centers. Ultimately, that demand should lift Digital Realty's net income and, by extension, its dividend and stock price.
Moreover, tech investors seeking diversification have even more reason to consider this stock. Buying Digital Realty gives them exposure to the real estate industry. And since tech investors can more easily understand what drives this particular company's results, it becomes an opportunity for diversification within one's area of knowledge. With its profitability and dividend payments, it would serve as an excellent non-tech addition to a tech-heavy portfolio.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Digital Realty Trust, Meta Platforms, and Oracle. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
