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Facebook, Microsoft Capital Spending Good For Data Center REITs

In their Q1 earnings reports, Apple ( AAPL ), Microsoft ( MSFT ) and other big Internet companies have signaled continued strong spending on cloud infrastructure — and that bodes well for data center operators, says Pacific Crest. “The five largest cloud companies ( Amazon.com ( AMZN ), Microsoft, Alphabet ‘s ( GOOGL ) Google, Facebook ( FB ) and Apple), which account for 80% of the capital investments by top-20 cloud companies, showed an acceleration in capital investments during Q1,” Brent Bracelin, a Pacific Crest analyst, said in a research report. Data center operators have been among the best-performing real estate investment trusts in 2016. REITs are essentially portfolios of income-producing properties. They bypass the standard corporate income tax obligations by distributing at least 90% of their income to shareholders in the form of dividends. Among the top data center companies, Equinix ( EQIX ) reports Q1 earnings on Wednesday after the close, while CyrusOne ( CONE ) reports on Thursday. Equinix stock, which has a so-so IBD Composite Rating of 64, is up 9% in 2016. But  CoreSite Realty ( COR ) stock has shot up 32% and leads its group with a highest-possible CR of 99. DuPont Fabros ( DFT ) is up 25%, while Cyrus One has jumped 17%. Digital Realty ( DLR ), meanwhile, has climbed 16%. Still, IBD’s 50-company Finance-Property REIT group overall is up just 3% this year and ranks No. 53 out of 197 groups tracked. Bracelin said Facebook’s capital spending jumped 125% to $1.1 billion. Microsoft’s capital spending rose 66% to $2.3 billion, while Amazon.com’s increased 35% to $1.2 billion. “Because many of these cloud operators use custom software and white-box infrastructure, there are few direct beneficiaries across the traditional technology landscape beyond some of the data center REITs,” said Bracelin.

CyrusOne Hits All-Time High As Data Center Stocks Advance

CyrusOne ( CONE ) stock hit an all-time high on the heels of Tuesday’s investor day, where the data center operator outlined goals to double the company’s revenue by 2020. Cloud computing and corporate outsourcing of IT infrastructure has increased demand for data center space. Data center operators — including DuPont Fabros Technology ( DFT ), Digital Realty Trust ( DLR ) and CoreSite Realty ( COR ) — are among the top performers in IBD’s Finance-Property REIT group. It’s ranked No. 46 out of 197 industry groups that IBD tracks. Many data center operators are real estate investment trusts. Apple ( AAPL ), Microsoft ( MSFT ), Facebook ( FB ) and Salesforce.com ( CRM ) are among tech companies expanding data centers. Data center operators provide space, power and cooling. Customers pack the warehouse-sized data centers with their own computer servers and other gear. The data center market has been divided among wholesale providers — such as Digital Realty   and DuPont Fabros — and retail operators such as Equinix ( EQIX ), though some lines are blurring. CyrusOne stock was up a fraction in midday trading in the stock market today , above 42, but earlier rose nearly 5% to 43.42, its record high. Shares have gained nearly 13% in 2016. At its investor day event, CyrusOne said that it aims to double its enterprise value from around $4 billion to $8 billion by 2020, said Colby Synesael, an analyst at Cowen & Co., in a research report. “The company plans to achieve this goal by doubling its revenue, EBITDA and normalized FFO from 2016 to 2020 while being prudent to maintain (debt) leverage at 4.5 times or less, so that it can achieve an investment grade credit rating over that period,” added Synesael. REITs use a cash flow metric called funds from operations, or FFO. DuPont Fabros stock has shot up more than 25% this year, while CoreSite has gained about 20%. Digital Realty is up 15%. Equinix, part of IBD’s Internet-Infrastructure Solutions group, has gained 5%. Capital spending has been rising at data center operators. DuPont Fabros, aiming to raise $275 million, announced a stock offering on March 17. “New leasing volume suggests that demand remains robust and should support DFT’s growth plans with low leverage,” said Barclays analyst Ross Smotrich in a report. “However, the trade-off is that DFT had made it abundantly clear at their November 2015 investor day that their growth strategy would not include new equity. When future capital needs arise, therefore, investors may anticipate an equity raise.” Image provided by Shutterstock .

Equinix Targets Telecity, Data Center M&A Heats Up

Equinix’s (EQIX) sudden $3.5 billion takeover bid for U.K.-based TelecityGroup, which had agreed to merge with Interxion Holding, could spur yet more data center operators to jump into the industry’s M&A fray, analysts say. Potential acquirers and takeover targets include Digital Realty Trust (DLR) and Coresite Realty (COR). Equinix stock was up 2% in morning trading in the stock market today, hitting a more than 14-year high above 270 earlier