Prediction: This Data Center REIT Could Double as AI Demand Soars

Digital Realty Trust (NYSE: DLR) is a different kind of real estate investment trust (REIT). Instead of holding properties such as shopping centers or apartments, the company specializes in data centers, owning more than 300 in more than 25 different countries.

Fortunately for the data center REIT, demand is booming thanks to industry tailwinds. Despite Digital Realty's size, such growth is on track to double the stock price within five years or less, and here's how.

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Growth and income in Digital Realty Trust

Digital Realty Trust was ahead of its time. The company's stock has traded since 2004, becoming the first data center REIT. This approach positions it to attract a unique set of investors. Because of its ties to the technology industry, growth-focused tech investors tend to follow it. Conversely, the requirement to pay a dividend ensures an income stream and likely makes the management more conservative than many of the tech enterprises it serves.

Thus, Digital Realty offers a balance of growth and income. Grand View Research forecasts an 11% compound annual growth rate (CAGR) for the data center industry. With that, the rule of 72 alone would point to a doubling of the stock price in a little more than six years.

Moreover, the state of the industry and Digital Realty itself could accelerate a rise in the stock price. The rapid growth of technologies that data centers support, namely artificial intelligence (AI) and quantum computing, almost ensures that demand for these centers will rise over the long term.

To this end, the company acquired land in key data center markets, particularly in the U.S., where it plans to build more facilities.

Furthermore, investors should not forget the aforementioned dividend. The company once increased its payout yearly, but it has not approved a dividend hike since 2022.

Still, at an annual payout of $4.88 per share, Digital Realty offers a dividend yield of almost 3.3%. Since the S&P 500 average yield is about 1.2%, it offers a generous dividend even without the yearly increases.

How it fares financially

Digital Realty is on track to outperform the aforementioned CAGR from financial growth alone. In the first nine months of 2025, revenue of almost $4.5 billion grew by 9% compared to year-ago levels. Also, since the trust kept costs under control, its operating income rose by 66% over the same period.

Furthermore, its funds from operations (FFO) income, a measure of a REIT's free cash flow, is also bullish for Digital Realty's growth. In the first three quarters of 2025, FFO income surpassed $1.9 billion, up 17% from the same period in 2024.

Despite that improvement, competition and the need to invest in more space have weighed on the stock. Also, Digital Realty shares grew slowly over the last five years, even with a huge spike in interest rates earlier in the decade, a factor that tends to reduce profits for REITs.

Nonetheless, the Federal Reserve has cut rates three times since September. Those lower rates should make expansion less costly, which could bolster Digital Realty's top and bottom lines.

Amid the pressure on the stock price, the REIT's stock sells at about 22 times its trailing FFO income. Considering the rising income, dividend, and growth potential of the data center industry, this could lead to multiple expansion that ultimately accelerates the growth in the stock price.

A doubling of the stock

Given the state of Digital Realty, the stock could double in five years or less.

The industry CAGR implies a slower growth rate. Moreover, the recent drop in the stock price is concerning, and investors might feel more comfortable if Digital Realty resumed its periodic payout hikes and did not need to invest so heavily in expansion.

However, demand for AI and, likely, quantum computing in the future is only going to make data centers more essential. That likely means spending on expansion now will benefit the company in the long term, particularly with lower interest rates.

Ultimately, if it can keep FFO income rising by double-digit percentages, the company's growth and the low valuation should position Digital Realty stock to resume its increases.

Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Digital Realty Trust. The Motley Fool has a disclosure policy.