Profiting From the Explosion of Data in Today's Digital World
If all the data on the Internet in 2018 was stored on Blu-ray, it would fill up 660 billion discs...
That's enough to stretch around the Earth 46 times. And that volume of data is expanding exponentially...
According to a report from Statista, humans produced 33 zettabytes of data in 2018. That's 33 billion terabytes (yes, billion with a "b")... or 375 million times more data than existed 22 years ago.
It's estimated that this year, 47 zettabytes of data will be created... surging threefold to 147 zettabytes in 2025. That would be enough Blu-ray discs to stretch around the Earth 17,516 times... or from the Earth to Jupiter, and then some.
Everything we do online uses, stores, and creates more data. All of this digital information needs to be managed. It needs tools to analyze it. And it all needs to be stored somewhere.
Enter today's company...
Digital Realty Trust (NYSE: DLR) is a real estate investment trust ("REIT") that owns the buildings ("data centers") that house servers – computers that process data – and rents out the space to both the companies that actually run the servers and the companies that need their data stored.
It operates more than 210 data centers all over the world, with a presence in 35 major metropolitan areas – from San Francisco to Miami, Dublin to Frankfurt, Tokyo to Melbourne.
In total, these buildings hold more than 34 million total square feet available for rent. Each data center averages more than 158,000 square feet. That's around three football fields of space per data center.
Digital Realty's global data coverage has attracted serious tech customers, like IBM, Oracle, Uber, and JPMorgan Chase. One of Digital Realty's top customers is social media giant Facebook, which rents space in 18 data centers and accounts for 6.7% of DLR's annual base rental revenue.
DLR is also valuable to the big companies that actually run the web of wires, fiber optics, and wireless communications that crisscross the planet – like Verizon and AT&T.
In total, Digital Realty serves more than 2,000 customers.
These customers are big, sophisticated, and growing. They exist across sectors like technology, health care, and financial markets. And they all have one thing in common: a fast-growing need for data storage and connectivity.
Digital Realty's numbers are strong... and growing.
Over the past 12 months, Digital Realty's total revenues exceeded $3.2 billion. That's 31% higher than 2017. Given the exponential creation of data in the coming decade, this level of growth is likely to continue.
The main way Digital Realty makes money is by renting out space within its data centers.
Last year, the company generated $2.3 billion in rental revenue, or 71% of revenue.
In many cases, Digital Realty rents out and operates entire facilities to single customers. For example, there's a full facility dedicated to Delta Airlines in Minnesota. These data-storage arrangements take time to implement (weeks to months) but are contracted for five to 10 years. They provide revenue visibility to DLR.
But not every customer needs an entire data center. Or a large customer may want to spread its data around geographically to be closer to its customers.
For customer needs like these, DLR runs facilities that contain the servers of many customers. This is called "colocation." Colocation contracts are easier to implement. They can be up and running in a matter of days. Contracts are put in place for two to three years.
Once a rental contract is in place, servers are set up, and data are loaded – and it is difficult and costly to dislodge. A moderate-size data rental within a data center can cost $15 million to $20 million to migrate somewhere else.
As a result, Digital Realty's customer retention is high, averaging just under 80% since 2010.
Digital Realty's strong and diverse revenue growth has translated into long-term earnings growth.
Adjusted funds from operations (or "A-FFO," a key measure of REIT profitability) are up from $1.63 per share in 2006 to $6.70 per share in 2019. This is an average annual rate of 12.5%.
And the company grew A-FFO through the financial crisis. Data creation transcended the recession.
As a REIT, Digital Realty must pay out at least 90% of its taxable income to shareholders.
So, as Digital Realty grows its earnings, its dividend grows, too. In 2006, investors received $1.08 per share in dividends. In 2019, it paid out $4.32 per share in dividends. It has raised its payout each year since 2005, and just raised it again for 2020.
The demand for data-center REITs will only increase from here. It's easier, and in many ways cheaper, for companies to use Digital Realty than it is to build or house their own servers. As companies look to outsource their data storage, Digital Realty will be a key beneficiary.
Sometimes investing is simple.