BofA raises Digital Realty Trust price target on AI demand strength

BofA raised its price target on Digital Realty Trust to $190 from $170 while keeping a Neutral rating; the stock trades at $178.56 near its 52-week high of $184.79 and is up 16.45% YTD. BofA based the new target on a 24x multiple of 2026 Core FFO (up from 22x) and cited durable AI-driven demand and low obsolescence risk; Digital Realty reported revenue growth of 11.88%. Other broker actions: Raymond James raised its target to $210 (Strong Buy), Bernstein initiated Outperform at $218, and Citizens reiterated Market Outperform at $220, signaling broadly positive analyst sentiment despite BofA's Neutral stance. Key risks noted include power provisioning and facility augmentation needs to support AI workloads.

Analysis

Digital Realty and Equinix are being re-valued primarily on optionality to AI hyperscale demand rather than near-term FFO improvement; that shift favors firms that can scale high-MW deployments with predictable power contracts and JV structures. The non-obvious bottleneck is not floor space but high-voltage grid interconnects and substations—projects with 12–36 month lead times and capex of roughly $7–15m per MW—that create meaningful timing risk between contracted demand and revenue recognition. Supply-chain friction for transformers, switchgear and specialized chillers will compress the effective ramp for whoever signs capacity-heavy hyperscaler deals this year.

Key tail risks are (1) a hyperscaler procurement pivot (more on-prem or internal builds) that removes a multi-year revenue tail; (2) a GPU-cycle correction that defers customer buildouts for 6–18 months; and (3) a macro shock that widens credit spreads and re-prices REIT multiples. Near-term catalysts to watch in days–months are large-scale JV announcements, hyperscaler take-or-pay contract terms in filings, and guidance around power provisioning lead times; medium-term (6–24 months) catalysts are grid interconnect progress reports and incremental FFO convertibility from new facilities.

Consensus is underweighting execution and financing friction: multiple expansion is being priced-in assuming frictionless scale-up and low obsolescence risk. That is asymmetric — if builds hit timing or cost overruns, FFO could compress by ~8–12% relative to current street expectations over 12–24 months. Conversely, a string of multi-year take-or-pay contracts would justify a premium over sector multiples and deliver 20–30% upside within 12–18 months.

Key Decisions for Investors

• Pair trade (9–15 months): Long DLR (equal-weight) / Short EQIX (equal-weight) — target spread capture 15–25%. Rationale: DLR has more JV optionality and faster packaging for hyperscale MW; stop if pair moves against by 12% (cut losses or hedge with calls).
• Income harvest (0–3 months): Sell 1–3 month covered calls on DLR at ~5–8% OTM to monetize the near-term analyst optimism; if assigned, reassess after quarterly results. Expected yield pickup 3–6% vs cash holding; risk is capped upside if a positive catalyst re-rates the stock.
• Asymmetric option (12–24 months): Buy DLR 12–18 month call spread (buy lower strike / sell higher strike) to limit premium outlay while retaining 20–40% upside if hyperscaler contracts convert to cash flow. Size 1–2% notional and use proceeds from short-term call sales to finance cost.
• Event hedge (days–months): Buy short-dated puts on DLR (or increase cash reserves) ahead of large JV/contract announcements to protect against downside if deals fall short or reveal unfavorable terms; trim hedge if announcements beat expectations.