'Tsunami' of AI demand is bullish for these 2 data center stocks - TD Cowen

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'Tsunami' of AI demand is bullish for these 2 data center stocks - TD Cowen
Credit: © Reuters.

The AI boom is driving a "tsunami" of demand for data centers, according to TD Cowen analysts. In fact, the firm’s channel checks showed that an estimated 2.1GW of data center (DC) leases were signed in the last 90 days driven by AI requirements. As a result, they see a new DC leasing record for 2023. The analysts view this as a positive for the medium-term outlook for Equinix (NASDAQ: EQIX ) and call it a near-term positive for Digital Realty Trust (NYSE: DLR ), although they say DLR is in need of a developmental JV to compete for large deals.

“Following substantial channel checks, we believe hyperscale demand for data centers has re-rated materially higher over the past three months,” analysts commented. “Not only have the number of signed/in-process hyperscale deals increased, but also the size of these deals has increased meaningfully”

The firm’s checks indicate that in the past three months:

1) Google signed a 600MW deal in Texas;

2) Microsoft signed a 420MW deal in Leesburg, VA;

3) Microsoft signed a 360MW deal in Dallas; and

4) Microsoft signed a 300MW deal in Chicago.

“Inclusive of other signed deals that were <200MW, a staggering 2.1GW (yes, Gigawatts) of U.S. data center leases have been signed in the last 90 days inclusive of ROFRs for future buildings,” the analysts added.

Currently, the third-party U.S. data center market is at ~10GW. The firm's checks show multiple +500MW requirements from hyperscalers and at least one +500MW requirement from the U.S. government. A major private data center operator mentioned their qualified leasing pipeline has increased to +1GW from ~500MW in just 90 days, highlighting the rapid rise of these AI requirements. With this high demand, they anticipate 2023 to break data center leasing records.

Hyperscalers are now pre-lease capacity 24-36 months ahead of facility delivery, which is longer than the 12-18 month pre-leasing window seen in 2022, the analyst further highlighted. Operators with capacity available within 24 months can command a premium for their services. This reflects the increasing scarcity of data center capacity as hyperscalers aim to secure future compute access. Enterprises are also affected, with hyperscalers' growing demands crowding them out of the data center market. The firm’s checks indicate that enterprises now pre-lease capacity up to six months in advance, a departure from historical practices.

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