The surge in artificial intelligence (AI) is driving immense demand for high-performance infrastructure. As hyperscalers and enterprises pour billions into AI, data center-focused real estate investment trusts (REITs) like Digital Realty Trust (DLR) and Equinix (EQIX) are essential. From faster processing to high-powered cooling, these data center REITs are key players in the AI arms race.

But last week, the market hit the panic button. Data center giants tumbled after Chinese AI firm DeepSeek unveiled a shocker - an open-source model that supposedly outperforms models from OpenAI and Meta Platforms (META), all at a fraction of the cost. Investors feared this could derail the AI spending spree, slamming DLR and EQIX.

But Mizuho’s Vikram Malhotra sees the market’s panic over DeepSeek’s cheaper AI model as overblown. Despite fears, he believes DLR and EQIX are poised for growth, with pre-leased pipelines and strong pricing power heading into 2025. He maintains “Outperform” ratings on both stocks, confident that their ability to adapt and capitalize on demand will drive long-term success.

Let’s take a closer look at these dividend-paying stocks that also have double-digit upside potential.

Data Center AI Stock #1: Digital Realty Trust

Austin-based Digital Realty Trust (DLR) powers the digital economy with a vast network of data centers, colocation, and interconnection services. Boasting a $53.5 billion market capitalization, its facilities house mission-critical applications for tech giants and enterprises alike.

Spanning North America, Europe, Asia, and beyond, its global footprint positions it to thrive amid soaring digital demand. With a high-quality, diversified tenant base - ranging from cloud providers to financial firms - DLR remains a key player in the data center REIT space.

Shares of the digital REIT took a 9% hit after Chinese firm DeepSeek unveiled an AI model rivaling top U.S. platforms. The news rattled tech stocks, sparking fears that AI’s energy demands might be lower than expected — bad news for data centers. Still, DLR remains resilient, climbing 13% over the past 52 weeks and hitting a high of $198 in late November.

Digital Realty continues its legacy of rewarding investors, dishing out a quarterly dividend of $1.22 per share on Jan. 17. This pushes its annualized payout to $4.88, delivering a steady 3.02% yield. DLR remains a reliable bet for income-focused investors in the digital infrastructure space.

On Oct. 24, Digital Realty delivered its Q3 earnings results and set records in leasing activity. The data center REIT posted core funds from operations (FFO) of $1.67 per share, up 3.1% year over year, alongside $1.36 billion in revenue, a modest 2.1% gain.

The real story, however, lies in its leasing momentum. Digital Realty secured renewal leases worth $258 million, with rental rates jumping 15.2% on a cash basis. New leasing surpassed $520 million, pushing its backlog to historic highs. Its backlog now represents 20% of annualized data center revenue, setting the stage for sustained long-term growth. 

Digital Realty is anticipated to announce its Q4 2024 earnings after the market closes on Thursday, Feb. 13. Management forecasts total revenue between $5.55 billion and $5.60 billion, while adjusted EBITDA is anticipated to land between $2.925 billion and $2.975 billion. Additionally, the company expects core FFO per share to range between $6.65 and $6.75.

Analysts tracking DLR project the company’s profit to reach $6.71 per share in 2024, up 1.82% year-over-year. They expect it to grow another 5.7% to $7.09 per share in 2025. 

Wall Street’s outlook on DLR stock is mostly optimistic, with a consensus “Moderate Buy” rating. Of 26 analysts covering the stock, 17 recommend a “Strong Buy,” one opts for a “Moderate Buy,” seven suggest a “Hold,” and just one advises a “Strong Sell.”

The average analyst price target of $190.29 indicates potential upside of nearly 17.9% from the current price levels. The Street-high price target of $226 suggests that DLR stock could rally as much as 40% from here.

Data Center AI Stock #2: Equinix

Equinix (EQIX), based in Redwood City, California is another REIT focusing on digital infrastructure. With a market cap of $88.3 billion, it builds interconnected data centers that fuel cloud computing, enterprises, and financial giants. 

EQIX stock climbed 9.3% over the past 52 weeks, peaking at $994.03 in late November. 

Equinix continues to reward its investors, paying a $4.26-per-share dividend on Dec. 11. With an annualized $17.04 payout and a 1.86% yield, the company remains a reliable income play. Its nine-year streak of consecutive hikes cements its commitment to shareholders, reinforcing confidence amid evolving data center demand.

Equinix unveiled its Q3 earnings results on Oct. 30 after the bell, delivering a solid performance that nudged its stock marginally higher the next day. The company posted an adjusted FFO of $9.05 per share, easily surpassing Wall Street’s $7.70 estimate. Revenue climbed 7% year-over-year to $2.2 billion, nearly in line with expectations. Strong pricing, record bookings, and steady xScale momentum powered its 87th consecutive quarter of revenue growth.

The xScale initiative, designed to meet hyperscaler demand with high-performance interconnection, continues to gain traction. Equinix recently announced plans to triple its investment in xScale across 13 sites. Its commitment to renewable energy also strengthens its appeal, particularly as AI data centers face rising power consumption concerns. Pus, with $7.2 billion of available liquidity and a net leverage ratio of 3.5x as of Sept. 30, 2024, Equinix remains financially healthy.

Equinix is gearing up to unveil its Q4 2024 earnings after the market closes on Wednesday, Feb. 12, and management forecasts revenue between $2.262 billion and $2.302 billion, while adjusted EBITDA is expected to land between $1.01 billion and $1.05 billion.

For the full year, Equinix raised its AFFO per share guidance to the $34.81 to $35.22 range, signaling an 8% to 10% annual increase. Revenue projections sit between $8.748 billion and $8.788 billion, reflecting 7% growth, while adjusted EBITDA is set to hit between $4.086 billion and $4.126 billion, maintaining a 47% margin.

Ahead of the Q4 earnings release, analysts tracking Equinix project FFO of $7.08 per share, down 3% from $7.30 per share in the year-ago quarter. 2024 FFO is anticipated to be $31.09 per share, with the bottom line projected to rise 9.2% to $33.96 per share in fiscal 2025.

On Jan. 20, Mizuho’s Vikram Malhotra reaffirmed a “Buy” on EQIX, lifting the price target to $1,094, implying 19.6% upside. Despite trimming AFFO estimates for 2025 and 2026 due to rising capital expenditures, the bullish stance signals confidence in Equinix’s long-term growth as digital infrastructure demand accelerates.

Wall Street is highly bullish overall, with a consensus “Strong Buy” rating for EQIX. Out of the 27 analysts covering the stock, 21 recommend a “Strong Buy,” one advises a “Moderate Buy,” and the remaining five analysts are playing it safe with a “Hold.” 

The average analyst price target of $1,034.72 indicates potential upside of 13.1% from the current price levels. However, the Street-high target of $1,218 suggests that the stock could surge as much as 33.1%.

On the date of publication, Sristi Suman Jayaswal did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.