Mizuho remains bullish on data centers; DLR remains top pick

Mizuho Securities reaffirmed its bullish stance on data center REITs, naming Digital Realty Trust (DLR) as its top pick and raising its price target to $191 from $177 based on strong bookings and demand from hyperscale customers; the firm also increased its price target for Equinix (EQIX) to $1,069. Mizuho anticipates strong rent spreads and occupancy gains for Digital Realty, along with potential revenue doubling in its 0-1MW segment by FY26, and views the company's new investment fund as a significant growth driver potentially boosting overall FFO by 3 to 5 cents upon closing.

Analysis

Mizuho Securities maintains a strongly positive outlook on data center REITs, designating Digital Realty Trust (DLR) as its top pick and increasing its price target to $191 from $177. This optimism is fueled by robust bookings, sustained demand from hyperscale customers, and several anticipated growth catalysts, despite DLR shares trading at a significant 30% premium (27 times adjusted funds from operations - AFFO) to the broader REIT sector. Mizuho's revised FFO forecasts for DLR are $7.13 for 2025 (modestly above consensus) and $7.63 for 2026, underpinning the new price target which applies a 27x AFFO multiple to FY26 estimates. Key drivers for DLR include projected strong rent spreads of 6% in 2025 and 7% in 2026, alongside occupancy gains of 170 and 200 basis points respectively. Furthermore, Mizuho identifies substantial upside in DLR's 0-1MW segment, with management conversations suggesting a potential doubling of revenue in this category by mid-to-late FY26, aiming for a $100 million quarterly run-rate which could add 1-2% to bottom-line growth. A newly formed investment fund is also seen as a major growth lever, potentially exceeding $10 billion and offering a more favorable fee structure and greater asset control than traditional joint ventures; its closure, anticipated by year-end 2025, could boost overall FFO by 3 to 5 cents. For Equinix (EQIX), Mizuho also raised its price target to $1,069 from $1,053, reflecting updated FFO estimates of $38.08 for 2025 and $41.12 for 2026. Mizuho believes DLR's premium valuation is justified by these strong fundamentals and growth prospects.

Key Decisions for Investors

• Investors may consider overweighting or initiating positions in Digital Realty Trust (DLR), given Mizuho's 'top pick' status and multiple identified growth drivers, despite its current premium valuation.
• Monitor DLR's progress on key catalysts including rent spread realization, occupancy gains, revenue growth in the 0-1MW segment, and the successful launch and scaling of its new investment fund, as these are critical to achieving Mizuho's FFO targets.
• Acknowledge DLR's current 27x AFFO multiple and 30% premium to the REIT group; while Mizuho justifies this with strong growth outlook, investors should weigh this against potential arguments that positive news is already priced in.
• For Equinix (EQIX), the upward price target revision suggests continued positive sentiment, warranting consideration for holding or accumulating positions, though it is not Mizuho's primary focus compared to DLR.