Should You Buy Digital Realty Trust Stock Right Now?

Data centers are all the rage right now due to the gigantic increase in spending for artificial intelligence (AI).

However, data centers aren't a new trend. Computing resources were already transitioning from local servers to centralized data centers, a digital transformation known as the cloud. Digital Realty Trust (NYSE: DLR) has been in this market for more than two decades.

Today, it's one of the largest publicly traded real estate investment trusts (REITs), with strong growth tailwinds as companies invest billions in infrastructure for artificial intelligence.

But should you invest in this REIT right now? Here is what you need to know.

Digital Realty Trust plays a crucial role in the data center field

Perhaps unsurprisingly, companies that need data center resources generally aren't experts in them. Data centers draw immense power and natural resources, have demanding climate requirements due to the heat generated by all those servers, and frequently spring up in strategic locations, such as near major deep-sea cable connection points.

That's where Digital Realty Trust comes in. The company acquires properties for data centers, then develops and operates them, renting out capacity and offering services to its tenants.

Digital Realty's tenants include major AI players such as Meta Platforms and Oracle, as well as small companies that may need only a few servers. In all, Digital Realty has more than 5,000 customers globally, spanning more than 300 data centers.

Data center investments should remain strong for the near future

REITs are typically strong dividend stocks, though they usually pay nonqualified dividends, so read up on how that could affect your taxes.

Ironically, despite all the AI hype, Digital Realty Trust hasn't raised its dividend in several years. That shouldn't necessarily turn investors away, though. The company refrained from increasing its dividend amid higher rates and costs during the past few years.

The benefit is that it maintains as much financial wiggle room as possible, allowing Digital Realty to continue expanding its real estate footprint. The stock's annualized dividend of $4.88 per share is well covered by management's 2025 funds from operations (FFO) estimate of $7.15 to $7.25 per share. A conservative approach to dividends may prove to be a wise strategy over the long run.

Data center spending is poised to continue during the next several years. Researchers from consulting firm McKinsey & Company estimate that global expenditures will approach $7 trillion by 2030. Digital Realty has about 2.8 gigawatts (GW) of capacity in place, with another 0.75 GW under construction. Digital Realty's management team estimates that there is enough available land to build out at least another four GW in capacity.

Investors could see Digital Realty continuing to pursue more of this addressable market as global data center spending rises. That could put off investors who focus solely on maximizing dividend income. However, it's worth considering that a larger real estate footprint will generate more recurring rent for dividends years from now.

Is the stock a buy right now?

Shares of Digital Realty have fallen by 6% during the past year, but that's on the back of a huge rally. The stock is still up by more than 60% during the past three years.

Digital Realty still trades at roughly 21 times its FFO. That doesn't feel like much value, considering Digital Realty's volatile FFO results during the past few years:

DLR Funds from Operations (TTM) data by YCharts

But once again, looking ahead to the long-term opportunity paints a brighter picture. Management estimates that data center capacity demand will increase by 3.5 times during the next five years. Digital Realty saw an 8% increase in cash-based renewal rates on leases in the third quarter. A strong pricing environment coincides with the anticipated growth in capacity demand.

In other words, it appears that Digital Realty's business should stay strong during the next five years if these trends continue. That makes the stock a solid buy right now for a long-term investor seeking a pick-and-shovel stock for some broad exposure to the rapidly growing data center sector.

Justin Pope 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 has a disclosure policy.