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What's in the Offing for Digital Realty's (DLR) Q3 Earnings?

Digital Realty's (DLR) global data-center footprint and high demand are likely to have aided Q3 earnings, though aggressive pricing pressure might have been a deterrent.

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This story originally appeared on Zacks

Digital Realty Trust DLR will report third-quarter 2021 results on Oct 26, after the bell. The company’s quarterly results are expected to reflect year-over-year growth in revenues and funds from operations (FFO) per share.

- Zacks

The data-center real estate investment trust (REIT) reported a negative surprise of 2.5% in terms of FFO per share in the previous quarter. Though the result was aided by decent demand and leasing for data-center facilities, the charge to reflect the higher corporate tax rate in the U.K. appears to have been a dampener.

Over the last four quarters, the company outpaced the Zacks Consensus Estimate on three occasions and missed in one, the average beat being 3.12%. This is depicted in the chart below:

Digital Realty Trust, Inc. Price and EPS Surprise

Digital Realty Trust, Inc. Price and EPS Surprise

Digital Realty Trust, Inc. price-eps-surprise | Digital Realty Trust, Inc. Quote

Let’s see how things have shaped up for Digital Realty prior to this announcement.

Factors to Consider

High growth in cloud computing, Internet of Things and big data, and an elevated demand for third-party IT infrastructure are spurring demand for data-center infrastructure. Moreover, growth in artificial intelligence, autonomous vehicle and virtual/augmented reality markets has been creating a robust base for data centers. Amid these, the demand for data-center space is likely to have been healthy during third-quarter 2021.

Hence, being infrastructure providers for this rapidly-growing digital economy, data-center landlords, such as Digital Realty, Equinix, Inc EQIX CyrusOne Inc. CONE and CoreSite Realty Corporation COR, are well placed for sustainable growth.

In the wake of the pandemic, data centers continue to benefit from the heightening reliance on technology. Demand and occupancy have been healthy in the top-tier data-center markets, while new constructions are being absorbed at a fast pace. The completion of its Indian joint venture — BAM Digital Realty — in September marks significant expansion of the premier global data-center platform, PlatformDIGITAL. Hence, Digital Realty, with its PlatformDIGITAL, is anticipated to have capitalized on these tailwinds during the third quarter.

Digital Realty also has a high-quality diversified customer base, comprising tenants from cloud, content, information technology, network, other enterprises, and financial industries. The majority of its tenants are investment-grade rated and numerous customers use multiple locations across the portfolio. This is likely to have provided the company with cash-flow stability during the period in discussion, thereby driving top-line growth during the period in discussion.

The Zacks Consensus Estimate for quarterly total revenues is pegged at $1.10 billion, indicating a 7.1% year-over-year jump.

Apart from these, it has been strengthening its portfolio on the back of expansions and development. In September, Digital Realty’s unit — Interxion — completed the third phase of the expansion of its data-centre facility in Amsterdam. Interxion also announced the expansion of its global data-center platform with the opening of a new facility to the east of Paris, during the same time frame.

Prior to the third-quarter earnings release, the company’s activities were adequate to gain adequate analyst confidence. The Zacks Consensus Estimate for third-quarter FFO per share has been revised marginally upward to $1.62 in two month’s time. Also, it indicates year-over-year growth of 5.2%.

However, Digital Realty competes with several data-center developers, owners and operators, many of whom enjoy ownership of similar assets in same locations as the company. Given the solid growth potential in the data-center market, competition from other providers is expected to have intensified in the September-end quarter, prompting aggressive pricing policies. This might have curbed Digital Realty’s growth.

What the Zacks Model Unveils

Per our quantitative model, Digital Realty has the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of a FFO beat this quarter.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Digital Realty has an Earnings ESP of +1.24%

Zacks Rank: Digital Realty currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.



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