Data Center REITs Are A Conservative Way To Play AI
The WSJ’s Dan Gallagher wrote an excellent overview of the recent tech stock market on Tuesday (“Picks and Shovels Still Rule The AI Tech Trade” [SUBSCRIPTION REQUIRED]):
Investors are choosing the companies on the receiving end of big tech’s spending spree.
New AI coding tools from companies such as Anthropic have made investors question the future of software companies, while the tech giants that are spending vast sums to enable those tools are also being punished.
The only somewhat safe place is proving to be the chip makers and other companies that benefit directly from the spending spree.
In other words, tech stock performance has split into categories depending on whose spending the money to develop AI (the hyperscalers i.e. GOOG/GOOGL MSFT AMZN META) versus whose getting that money right now (memory chip makers like MU SNDK LRCX) – as well as the breakdown in enterprise software stocks as investors ponder their endgame in an AI world.
You can see this in the performance of semiconductor stocks (SMH), the Magnificent 7 (MAGS) and software stocks (IGV) since October 29, 2025. However, I believe this trade has mostly played itself out and am taking the other side at this point, buying software stocks and avoiding semiconductors.
Another way to play the same game is to buy the Data Center REITs: Equinix (EQIX) and Digital Realty (DLR). Like the memory chip makers, these companies are on the receiving end of the money being spent now as they provide the infrastructure for AI in contrast to the hyperscalers whose return on investment (ROI) won’t come until much later.
Indeed Equinix (EQIX) reported a blowout quarter after the close Wednesday. They guided for 2026 revenue to increase 10.4% at the midpoint and adjusted funds from operations (AFFO) to also increase 10.4% at the midpoint to $42.335/share. That’s excellent growth for real estate. While shares are surging in the premarket (+10%), at the current price ($953) the valuation is still reasonable at 22.5x forward AFFO guidance.