HSBC Upgrades US Data Center Stocks Due to AI Demand

HSBC analysts have raised their ratings for US data center stocks Equinix and Digital Realty Trust, attributing the upgrades to “strong AI-driven demand and constrained supply in major markets.”

Equinix has been upgraded from ‘Hold’ to ‘Buy’, with a new price target set at $1,000, an increase from the previous target of $865. Digital Realty has been moved from ‘Reduce’ to ‘Hold’, with its target price raised from $124 to $160.

The demand for data centers has outstripped supply in 2024, fueled by robust demands related to AI and limited availability in critical markets. Despite this high demand, the shares of Equinix and Digital Realty have not performed as well as the broader market due to some company-specific concerns. Nevertheless, HSBC expects these operational issues to reduce, forecasting strong momentum for these companies in 2025.

The upgrade for Equinix is supported by several factors. Analysts predict improved utilization rates will drive revenue growth to 10% in 2025, up from the 7% anticipated for 2024. This growth is aided by a favorable interest rate environment that benefits small and medium-sized enterprises, as well as increased capacity in key markets.

Additionally, significant growth is anticipated from Equinix’s xScale joint venture, and the company is seen as “a major beneficiary when AI progresses to the inferencing phase,” according to HSBC. Equinix’s growth potential appears more robust and stable compared to Digital Realty, especially due to its exposure to the retail sector and attractive valuation metrics.

On the other hand, Digital Realty’s upgrade is based on a favorable pricing environment for the “>1MW” power block segment expected in the next one to two years. However, growth may face constraints tied to the company’s lease expiration schedule, according to HSBC.

Despite these challenges, adjusted funds from operations (AFFO) growth for Digital Realty is expected to align closely with revenue growth thanks to a more streamlined balance sheet, though it may lag behind Equinix’s growth. Digital Realty’s significant exposure to the “>1MW” segment is likely to capture higher bookings driven by AI; however, the advantages of new bookings and pricing power appear to be mostly priced into the stock already.

The increased target price for Digital Realty reflects the higher target multiple associated with an improved AFFO growth outlook, as noted by HSBC analysts.