HSBC Analysts Upgrade Ratings for US Data Center Stocks

HSBC analysts have recently upgraded their ratings for two major US data center stocks: Equinix (NASDAQ:EQIX) and Digital Realty (NYSE:DLR). This decision is based on expectations of strong AI-driven demand combined with constrained supply in key markets.

Upgrades and Price Targets

• Equinix has been upgraded from ‘Hold’ to ‘Buy’, with a new price target of $1,000, up from $865.
• Digital Realty is upgraded from ‘Reduce’ to ‘Hold’, with a target price raised to $160 from $124.

The demand for data centers in 2024 has already surpassed supply, attributed mainly to robust AI demand and limitations in key market supply.

Performance vs. Market

Despite the upgrades, shares of Equinix and Digital Realty have underperformed relative to broader indices due to specific company issues. Analysts at HSBC believe that these operational challenges will ease, resulting in significant momentum for both companies in 2025.

Equinix’s Growth Potential

Factors supporting Equinix’s upgrade include:
– Improved utilization rates leading to an expected revenue growth of 10% in 2025 (up from 7% in 2024).
– A favorable interest rate environment fostering small and medium-sized enterprise consumption.
– Increased capacity in major markets.
– Contributions from the xScale joint venture expected to grow considerably.
– Anticipation that Equinix will benefit when AI transitions to the inferencing phase.

Equinix’s growth trajectory appears more stable compared to Digital Realty, largely due to exposure to the retail vertical and a more attractive valuation.

Digital Realty Insights

Digital Realty’s upgrade is attributed to a strong pricing environment for the >1MW power block segment over the next couple of years. However, growth might be constrained due to the company’s lease expiration schedule.

Despite this, the adjusted funds from operations (AFFO) growth is projected to align more consistently with revenue growth owing to a leaner balance sheet, even if it is expected to be less than Equinix’s growth.

Digital Realty’s increased exposure to the >1MW segment is likely to drive higher bookings from AI, though these benefits seem already factored into the current market price. The higher target price reflects an increased target multiple aligned with an improved AFFO growth trajectory, according to HSBC’s analysis.