Top 3 Data Center Stocks to Buy Right Now
While global economic growth has slowed in 2022 due to inflation and other macro factors, one area of the economy in particular is firing on all cylinders: data centers. These complex real estates act as computing units for the Internet itself. But as everyday use of the World Wide Web evolves and grows, massive amounts of new data are created. All of this information needs to be computed, moved and stored, and a data center upgrade cycle is underway to facilitate this boom in digital business.
To that end, three Fool.com contributors are considering buying shares of Alphabet (GOOGL 2.09%) (GOOG 2.16%), super microcomputer (SMCI 2.92%)and Digital Real Estate Trust (DLR 1.46%). Here’s why they think these three stocks are the best data center stocks to buy right now.
The ubiquitous internet company is getting into hardware buying
Nicholas Rossolillo (Alphabet): Alphabet, Google’s parent company, is one of the world’s leading data center operators. Google owns a few dozen of these massive computing units to run its myriad services, and Google Cloud and other Alphabet companies rent space for its hardware in other data centers around the world. Like other internet companies, Google is in the midst of a surge in spending on its infrastructure to accommodate more data and more advanced uses of the web.
Upgrades to this incredibly complex technological real estate cost a considerable amount of money. Alphabet revealed in its second quarter earnings update that it spent $16.6 billion on property, plant and equipment in the first half of 2022, up sharply from $11.4 billion in the same period. last year. Coupled with the slowing growth of its online advertising empire, this weighed on Alphabet’s results. As a result, free cash flow generated is essentially stable over the last reported 12-month period, even though revenue increased by 16%.
Alphabet’s rampant spending on data centers and hardware will pay off over time as it strives to continually improve its services. And since it goes through an infrastructure upgrade cycle, it’s still an incredibly profitable business. The operating profit margin was just under 30% over the past year. Alphabet uses this profitability to repurchase shares as part of a return of excess cash to shareholders.
That being said, this stock has been rattled by the 2022 bear market (stocks are down 24% this year at the time of this writing) and now trades at just 20 times the value of the company compared to free cash flow. Google’s growth has indeed slowed, but it is a rock-solid company that continues to grow steadily with the use of the internet over time. I’m still picking up stocks in the middle of a recession and holding out for the long haul.
This stock is up 40% in 2022 and still looks cheap
Billy Duberstein (super microcomputer): With so many tech stocks down for the year, you might be surprised that I’m recommending a stock that defied the odds and actually rose 40% in 2022.
Super Micro Computer manufactures server and storage systems for data centers, cloud computing enterprises and Internet of Things/telco applications. In general, as a “server assembler”, he tends to have relatively low margins in a competitive field. So how has the company managed to defy the odds this year?
Under the leadership of founder and owner-operator Charles Liang, Super Micro is headquartered in Silicon Valley, very close to the leading CPU and GPU chip designers the company puts into its servers. From these close relationships, Super Micro has developed methods for large data center operators to achieve better total costs of ownership in two important ways.
First, Super Micro builds its servers with a modular “building block” design. So instead of customizing a new server from scratch every time there’s a new chip architecture, Super Micro can simply insert a new “block” into its designs. This speeds time to market and also helps customers save money, due to their ability to trade “blocks” over time, instead of entire servers.
Second, Super Micro markets itself as a “green computing” provider, with the goal of making its products as energy and heat efficient as possible. Large data centers require a huge amount of electricity, as well as cooling systems, to operate. And given the impact of soaring natural gas prices and heat waves on electricity costs this year, more and more customers are now turning to Super Micro’s solutions.
During the latest earnings call, Liang noted Super Micro Computer’s power utilization efficiency (PUE), which basically measures the total amount of energy used in a data center divided by the amount of energy used for computer functions. The closer the PUE is to 1, the more efficient the data center.
Super Micro’s latest solutions push 1.05 PUE, which is incredible considering the industry average of 1.57. That’s an improvement of nearly 50%! Liang says if the entire industry used Super Micro’s solutions, it would save $10 billion a year and eliminate the need for 30 fossil fuel power plants.
In the last fiscal year ending in June, Super Micro grew revenue by 46%, with earnings per share (EPS) up 143%. Not only that, but management expects continued revenue growth of 27% in the middle of its range for 2023, and earnings per share of “at least” $7.27, which would represent 37% growth over to 2022. Liang outlined ambitious growth plans. to reach $10 billion in mid-term and $20 billion in long-term revenue, up from just $5.2 billion last year.
Given today’s proven growth and Liang’s outlook, Super Micro stock still looks like a steal at just 8.7 times its 2023 EPS forecast, despite rising year-to-date.
The Data Center Giant You Didn’t Know You Need
Anders Bylund (Digital Realty Trust): The cloud computing titans are not alone. When Alphabet or Amazon want to expand their massive cloud services to a new location, they’ll choose a company that provides data center space and connectivity in the right place, at the right price, with the right features. Digital Realty Trust often comes up in these discussions, and the company wins many of these large-scale data center deals from networks like Google Cloud and Amazon Web Services.
The company operates more than 300 data centers in 25 countries and six continents. With a flexible and consistent architecture from data center to data center, Digital Realty offers a reliable platform that customers can learn once, then deploy again and again with predictable results.
And the business is booming. Digital Realty has recently reported strong demand in key markets such as Japan, Europe and North America, especially from hyperscale customers like the cloud giants mentioned above. In the second quarter of 2022, funds from core operations (FFO) increased 12% year over year, with a 4% increase in total operating revenue.
The company also pays a generous dividend, with an unbroken string of annual payout increases dating back to Digital Realty’s IPO in 2004. The dividend yield stands at 3.9% today, partly at cause of the fall in the share price. Digital Realty shares have lost over 30% of their value in 2022. I’m strongly tempted to lock in those bountiful dividend yields by buying Digital Realty shares when the stock is cheap.