Data center stocks drive strong growth by marrying technology and real estate


In this clip of “Real Talk” on Motley Fool live, recorded on March 25Motley Fool contributors Matthew DiLallo and Tyler Crowe explain why investors need to manage their expectations if they enter the data center space and talk about the differences investors can expect with these stocks versus stocks high-growth technologies.

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Matthew DiLallo: I think you have to look at data centers as a way to take advantage of the tech infrastructure boom using real estate. Of course we’ve seen a lot of volatility in the sector and I didn’t expect to see so much volatility moving from tech stocks to this because you’re dealing with pretty stable contracts and you’re dealing with a long tailwind term of a growing business. That’s really how you’re going to play. Instead of investing in Meta (NASDAQ:FB) shares or Amazon (NASDAQ: AMZN), it’s just a way to get into the thick of things without being exposed to technology. It’s different from other real estate stocks in the sense of growth you’re going to see. I think these are three to five year contracts compared to office and net lease which can be 10 to 25 years so there is a bit more upside potential as demand increases for this type of properties. We are seeing growth in multifamily. There’s development, but there’s so much going on with digital transformation and all the data that’s going on, we need so much capacity. As Brookfield Infrastructure (NYSE: BEEP), they mentioned that there is a 100-year super cycle in data infrastructure. It will be cycle after cycle of building new capacity for data centers, cell towers, small cells, fiber optics. There are so many investments needed in this sector. It’s like your way of being a real estate growth investor versus other types, which is more like a dividend cash flow type business. You get that with data centers, but it’s so much better than other property types.

Tyler Crowe: I would say if there’s a downside to going into the data center, I guess there’s the nuances of the data and maybe the computing power is one thing. Typically, when you contract in data centers, it’s basically on a megawatt basis, the amount of power you’re consuming. Over the years, the price per megawatt has gone down simply because computing power has improved. What ends up happening is that businesses have to compensate for the drop in price per megawatt by pumping more megawatts per square foot into that business. This is where there is a bit of reinvestment that comes into play which can eat away a bit in the long run. But, like you said, with reinvestment and things like that, they can usually offset that. The other thing I would just say is manage your expectations a bit. As you said, they are very stable producers and there are a lot of avenues for growth, but we are talking about companies that are increasing their revenue by 9%, 10% per year, that’s a pretty good year. You’re not going to get into a tech growth stock where you’re going to see 40% revenue growth, earnings growth, things like that. They are the turtles of the tech world. In doing so, don’t be discouraged when you only see 10% growth, as these companies have been great creators of wealth over the long term with dividends, with slow and steady performance that tends to overshoot, outperform the markets simply because it’s consistent. If you’re looking at a long-term horizon and are willing to ignore what looks like timid growth relative to the tech sector, it will work to your advantage.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Matthew DiLallo owns Amazon, Brookfield Infrastructure Corporation, Brookfield Infrastructure Partners and Meta Platforms, Inc. Tyler Crowe owns Amazon and Brookfield Infrastructure Partners. The Motley Fool owns and endorses Amazon and Meta Platforms, Inc. The Motley Fool endorses Brookfield Infra Partners LP Units, Brookfield Infrastructure Corporation, and Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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