Data Center View_ Still cautious, but context matters

Summary of Data Center View - Barclays Research (24 February 2025) Industry Overview - Industry: U.S. Communications Infrastructure - Key Companies: Digital Realty Trust, Inc. (DLR), Equinix, Inc. (EQIX), Iron Mountain Inc. (IRM) Core Insights - Cautious Outlook on Data Center Growth: The company maintains a conservative stance on data center (DC) growth, influenced by Microsoft (MSFT) commentary regarding the AI ecosystem and potential lease cancellations [1][5][7] - Hyperscaler Spending Dynamics: Hyperscalers have historically increased capital expenditures (capex) to secure market positions in AI, but this trend may be shifting. MSFT's capex for FY26 is uncertain, with a focus on optimizing existing capacity rather than expanding significantly [5][7] - Market Sensitivity: The DC ecosystem is sensitive to changes in perceived AI investment value, with older, less efficient assets facing the greatest risk [5][7] Company-Specific Insights Microsoft (MSFT) - Capex Plans: MSFT plans to spend over $80 billion on infrastructure for FY ending June 2025, but future spending may be adjusted based on capacity and component availability [5][7] - Lease Cancellations: Reports of lease cancellations by MSFT are common in the industry and may relate to strategic shifts rather than outright reductions in capacity needs [7] Digital Realty Trust, Inc. (DLR) - Stock Rating: Underweight - Revenue Dependency: MSFT is a significant tenant, contributing 11.5% of DLR's revenue. A slowdown in MSFT's leasing could negatively impact DLR's leasing volume [5][7][43] - Market Position: DLR has an attractive mark-to-market on leases, which could support pricing and core funds from operations (FFO), but weakening demand may affect sentiment [7][43] Equinix, Inc. (EQIX) - Stock Rating: Equal Weight - Price Target: $822.00, with a current price of $909.01 indicating a potential downside of -9.6% [4][51] - Market Risks: Macro factors such as currency fluctuations and energy costs could impact EQIX's earnings and valuation [57][58] Iron Mountain Inc. (IRM) - Stock Rating: Overweight - Price Target: $130.00, with a current price of $91.46 indicating a potential upside of +42.1% [4][60] - Business Risks: The document storage sector is in decline, and the company may struggle to replace lost revenue with new verticals that have lower margins [68] Additional Considerations - Market Dynamics: The DC industry faces risks from both emerging competitors and the concentration of capacity among a few hyperscalers, raising questions about supply constraints and investment prudence [5][7] - Future Outlook: Anticipation of more risks and narrative shifts in the DC market in the coming quarters, particularly regarding AI spending and capacity utilization [5][7] Conclusion The research indicates a cautious outlook for the U.S. communications infrastructure sector, particularly in light of potential shifts in hyperscaler spending and market dynamics. Key players like MSFT, DLR, EQIX, and IRM are positioned differently based on their exposure to these trends, with varying implications for investment strategies.