Meet the Monster Stock that Continues to Crush the Market

The stock market has done very well over the years. The S&P 500 (SNPINDEX: ^GSPC) has gained 235% over the last decade (12.9% annualized) and 640% over the past 20 years (10.5% annualized). Because of that, simply parking your money in an S&P 500 index fund would have been a very winning strategy.

However, many stocks have outperformed the S&P 500 over the years. One company with market-crushing returns is Digital Realty Trust (NYSE: DLR). It has delivered a nearly 275% total return over the past decade (14.1% annualized) and more than 2,400% in the past 20 years (17.5% annualized). Here's a closer look at this market-smashing stock and whether its outperformance can continue.

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Building an industry behemoth

Digital Realty is a real estate investment trust (REIT) focused on owning data centers. These facilities serve as vital infrastructure for our increasingly digital economy. They're crucial to supporting the growth of cloud computing and artificial intelligence (AI).

The data center REIT owns over 300 data centers in more than 50 metro areas worldwide. It leases capacity in these facilities to more than 5,000 customers.

Digital Realty has built its global data center platform through a combination of organic investment and acquisitions. It has made several notable acquisitions, including buying U.S. data center operator DuPont Fabros for $7.6 billion in 2017 and European data center platform Interxion for $8.4 billion in 2019. It also formed a joint venture with Brookfield Infrastructure to buy Latin American data center operator Ascenty in 2018. Those investments have grown Digital Realty into the fourth-largest publicly traded REIT in the U.S., with a $61 billion equity market cap and $78 billion enterprise value.

These heavy investments have grown the REIT's revenue and earnings at above-average rates. That has supported robust dividend growth of 680.5% over the past 20 years. This combination of income and growth has enabled Digital Realty to deliver the highest total returns in the REIT sector over the last 20 years and within the top 10 during the past decade.

More growth ahead

The need for digital infrastructure like data centers remains robust. Global data center capacity demand projects to grow at a brisk 22% compound annual rate through 2030 to support AI and non-AI workloads. This massive need for data center capacity will require an equally staggering level of investment. According to McKinsey, the world will need to spend nearly $7 trillion in capital by 2030 on data centers and related infrastructure.

As a leader in operating and developing data centers, Digital Realty is in a prime position to capitalize on this investment megatrend. One strategy it has employed to leverage its platform, vast land position, and expertise is bringing on financial partners to help fund the build-out of additional data centers.

For example, it formed a $7 billion joint venture with private equity giant Blackstone in 2023 to build data centers in three metro areas in Europe and North America. Blackstone will fund 80% of that capital, with Digital Realty financing the other 20%. Digital Realty also formed a build-to-suit data center development joint venture with fellow REIT Realty Income that year to construct two data centers in Northern Virginia. Meanwhile, the company formed its U.S. Hyperscale Data Center Fund earlier this year as it seeks to raise $2.5 billion from investors to support the development of additional large-scale U.S. data centers.

This strategy positions Digital Realty to deliver accelerated earnings growth in the future as it builds more data centers than it could have funded internally.

The potential to continue crushing the market

Digital Realty has delivered market-mashing returns over the past two decades as it built out a leading global data center portfolio to support increasing digitalization. That megatrend is only growing stronger as AI emerges as an accelerant. Digital Realty is in an excellent position to continue capitalizing on this trend, especially after securing a vast array of funding partners to help finance its continued expansion. That growth potential makes it look like a great stock to buy and hold for those seeking to earn market-beating returns.

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Matt DiLallo has positions in Blackstone, Brookfield Infrastructure, Brookfield Infrastructure Partners, Digital Realty Trust, and Realty Income. The Motley Fool has positions in and recommends Blackstone, Digital Realty Trust, and Realty Income. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.