On Friday, HSBC upgraded Digital Realty Trust (NYSE:DLR) stock from Reduce to Hold, increasing the price target to $160 from the previous $124. The upgrade reflects a positive outlook on the company's pricing environment and asset performance for the coming years.
The analyst cited several reasons for the upgrade, noting that the pricing environment for the '>1MW' segment appears strong for the next one to two years. However, growth may be limited due to the schedule of lease expirations.
Additionally, the analyst expects Adjusted Funds From Operations (AFFO) growth to align more closely with revenue growth, benefiting from a leaner balance sheet. This growth is anticipated to be consistent, though potentially lower than that of competitor Equinix (NASDAQ:EQIX).
Digital Realty's significant exposure to the '>1MW' customer segment, which includes high demand from artificial intelligence (AI) applications, was highlighted as a factor that could lead to higher bookings. Despite this advantage, the analyst believes the benefits of bookings and pricing power are already reflected in the current stock price.
The new price target of $160 represents an increase in the target multiple to 22.5 times, up from 19.0 times, indicating an expectation of an improved AFFO growth trajectory for Digital Realty Trust. The upgrade to a Hold rating suggests that HSBC now views the stock as a more stable investment.
In other recent news, Digital Realty Trust has made significant strides in its financial restructuring and green initiatives. The company has expanded its senior unsecured multi-currency global revolving credit facility to $4.2 billion and its Japanese yen-denominated revolving credit facility to approximately $297 million.
Both facilities now have an extended maturity date set for January 2029. These financial adjustments come with a sustainability-linked pricing component, reflecting Digital Realty's commitment to environmental, social, and governance targets.
Simultaneously, the company has issued €850 million in senior unsecured notes via its subsidiary, Digital Dutch Finco B.V., to fund green projects. The notes, due 2033, will support initiatives in renewable energy and energy efficiency.
Furthermore, Digital Realty Trust has initiated an offering of Euro-denominated Guaranteed Notes through Digital Dutch Finco B.V., with the intent to finance or refinance Eligible Green Projects.
In terms of analyst updates, Truist Securities has raised the price target for Digital Realty Trust to $168.00, maintaining a Buy rating. Conversely, TD Cowen has reduced its target to $120, retaining a Hold rating. These changes follow Digital Realty Trust's robust Q2 performance, securing $164 million in new contracts, and the successful private capital drive that brought in over $10 billion.
InvestingPro Insights
Digital Realty Trust's recent upgrade by HSBC aligns with several key metrics and insights from InvestingPro. The company's market cap stands at $52.56 billion, reflecting its significant presence in the Specialized REITs industry. InvestingPro Tips highlight that Digital Realty is trading near its 52-week high, which corroborates HSBC's view that the stock's current price already factors in many positive aspects.
The company's strong financial position is evident from its ability to maintain dividend payments for 21 consecutive years, with a current dividend yield of 3.1%. This consistent dividend history may appeal to income-focused investors, especially given the analyst's expectation of consistent AFFO growth.
While HSBC notes the potential for higher bookings due to AI-related demand, it's worth considering that Digital Realty is trading at a high P/E ratio of 44.99. This valuation metric, along with the InvestingPro Tip indicating high EBIT and EBITDA valuation multiples, suggests that investors are pricing in significant growth expectations.
For readers interested in a deeper analysis, InvestingPro offers 11 additional tips for Digital Realty Trust, providing a more comprehensive view of the company's financial health and market position.
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