Deutsche Bank ups Digital Realty Trust to Buy on robust demand, growth visibility

Investing.com -- Deutsche Bank (ETR:DBKGn) upgraded shares of Digital Realty (NYSE:DLR) Trust to Buy and lifted the target price to $194 from $185. The company’s shares rose 1.5% in premarket trading Wednesday.

“Admittedly, our August 2023 downgrade was premature, and the stock remains what we'd argue is the preferred/most widely held name among the group,” analyst Matt Niknam said in a note.

The upgrade comes amid a backdrop of sustained demand for AI, hyperscale, and enterprise solutions, coupled with space and power constraints that are expected to persist. These factors contribute to a favorable demand and pricing environment for Digital Realty.

The data center REIT has also reported over $1 billion in bookings for the last twelve months and boasts a record backlog of nearly $900 million, which supports visibility into its future growth trajectory.

Deutsche Bank expects Digital Realty's mid-single-digit Core Funds From Operations (FFO) per share growth in 2025 to accelerate in the following years.

The company’s balance sheet has been strengthened, with leverage reduced to approximately 5x by the end of 2024.

“Despite the headwind from "higher-for-longer" interest rates, we'd note DLR's success in successfully tapping into multiple funding sources including debt, equity, development JV's, and sales of non-core assets,” Niknam notes.

While Deutsche Bank sees the company's premium valuation of 24.7 times its 2026 estimated Price to Adjusted Funds From Operations (P/AFFO) as a potential risk, the firm expects Digital Realty's growth to significantly outperform its peers over the long term.

The bank also considered risks such as a slowdown in hyperscale/AI leasing and the potential impact of a TikTok ban but believes these factors are unlikely to alter the positive multi-year growth outlook for Digital Realty's Core FFO per share.