:max_bytes(150000):strip_icc()/GettyImages-2226519693-f2741f64418e4083b668615874c7e839.jpg "A New Data Center Stock Is Coming To Wall Street, But Can It Soar on AI Hype?")
:max_bytes(150000):strip_icc():format(jpeg)/GettyImages-2226519693-f2741f64418e4083b668615874c7e839.jpg)
Key Takeaways
- AI data center developer Fermi America filed earlier this week to go public as a real estate investment trust, a form of equity that differs in important ways from other stock investments.
- Data center REITs, despite being key facilitators of the AI boom, have not delivered the kind of eye-watering stock market returns of other AI infrastructure investments.
- Long contract durations, dividend requirements, and interest rate sensitivity are some of the reasons AI-exposed REITs haven’t taken off.
Wall Street is getting a buzzy new AI data center stock soon, but investors looking for Nvidia-like returns may want to look elsewhere.
Fermi America, a nascent AI data center project co-founded by former Texas governor and Energy Secretary Rick Perry, earlier this week filed to go public as a real estate investment trust (REIT). The company is targeting an approximately $13 billion valuation.
Fermi’s real estate portfolio will consist of a single 6,000-acre energy and data center campus being built with the Texas Tech University System outside Amarillo, Texas. The campus is expected to house 18 million square feet of AI data centers, powered by 11 gigawatts of nuclear, natural gas, wind, and solar energy. Fermi is aiming to have 1.1 gigawatts of power online by the end of next year.
Fermi will join a small group of REITs focused on data centers, for which AI is driving up demand. Data center REITs like Equinix (EQIX) and Digital Realty (DLR) own and operate vast portfolios of data centers through which clients access cloud computing platforms and AI models.
Why This Matters For You
Booming demand for artificial intelligence has driven up the share prices of a variety of companies involved in the construction and operation of cutting-edge data centers. But the economics of real estate make it unlikely data center REITs can deliver the kind of upside investors might expect from an AI infrastructure play.
Why REITs Don’t Deliver Nvidia-Like Returns
However, investors in these companies have not reaped the kind of eye-watering returns of other AI-exposed firms. Shares of Equinix and Digital Realty shares are up just 13% and 52%, respectively, since the launch of ChatGPT in late November 2022 sparked the AI frenzy on Wall Street. Meanwhile, Microsoft (MSFT) stock has doubled over the same period, and Nvidia (NVDA) has risen 950%.
The comparatively meager returns of data center REITs can be attributed to the unique characteristics of real estate investing. Data center leases are long-term commitments with predetermined rent increases. The length of these contracts gives investors a relatively clear view of future cash flows, but also curbs the landlord’s ability to take advantage of booming AI demand and limited supply.
REITs are required by law to distribute at least 90% of their taxable income to investors as dividends, limiting how quickly they can grow through acquisitions. Other AI infrastructure providers, like hyperscalers and chipmakers, can more rapidly scale their operations by reinvesting profits.
REITs are also more sensitive than other equity investments to interest rates, which have been elevated for the entirety of the AI rally. The Federal Reserve cut the federal funds rate earlier this month, which could drive down interest rates in the future. Though policymakers remain concerned that tariffs will cause inflation to reaccelerate, potentially preventing additional rate cuts.
