The world just reached a major digital tipping point in connectivity: right now, 51% of the planet’s 7.6 billion people have an internet connection, up from just 1% back in 1995. What’s more, the next couple of years will usher us into the Zettabyte Era, which should greatly benefit data centers and the peripheral businesses that allow them to run effectively.
Thanks to cloud computing, vast amounts of data generated by consumers, enterprises and governments can be easily stored, processed and disseminated to users around the world. All that cloud data actually resides at physical data centers scattered around the globe. These windowless and boxlike structures are essentially the planet’s digital factories, which means companies that build, operate, and service data centers are well positioned to profit from the digital information era.
In North America alone, investment in the data center sector totaled more than $20 billion in 2017, surpassing the volume of the three previous years combined. All that new capacity has been easily absorbed due to heightened demand.
Meanwhile the industry’s good fortunes are having a positive impact on the semiconductor and electric utilities sectors.
As tech titans and other companies that have built businesses around Big Data spend billions of dollars on the machines that will manage all the data generated and consumed by their clients, companies such as Intel, Advanced Micro Devices, Nvidia and Samsung Electronics are making a killing.
In Q1 2018, Intel’s data center unit generated revenues of $5.2 billion, up 24%. This compares to just 3% YoY growth for its PC chip unit over the same period. Similary, AMD reported 10% sales growth driven by rising interest in its Epyc server product from data center owners; Samsung experience a huge jump in sales and revenues at its chips unit driven by particularly strong demand for memory used in servers; and Nvidia’s artificial intelligence chips business for data centers is on course to generate more than $2 billion in annual revenue.
Although digital data is perceived as having a very small ecological footprint, the truth is that storing, moving, processing and analyzing data actually requires a ton of energy. Data centers consume more than 2% of the world’s electricity and emit roughly as much CO2 as the airline industry. Global data traffic is expected to double every four years, which will push up demand for electricity in the future.
These days, streamed video content is one of the biggest contributors to the rising data count. Cisco reckons that video will make up 82% of internet traffic by 2021, and that Consumer Video-on-Demand (VoD) traffic will be equivalent to 7.2 billion DVDs per month — meaning, it would take more than 5 million years to watch the amount of video that will cross global IP networks each month in 2021. Energy usage can only soar as a result, especially as Internet of Things (IoT) devices become more integrated into daily consumer and industrial activities.
As more individuals and enterprises interact in the digital realm, as global internet penetration rises, and as blockchain & 5G technologies permeate healthcare, financial services, media, technology, manufacturing, agriculture, retail, etc, the amount of data created, stored, analyzed and transmitted will only increase. This will benefit companies that build, operate, lease out and cool data centers around the world, at least until capacity outgrows demand and/or new data compression technology make storage more efficient.
Investors can gain exposure to this secular story via data center REITs. Over the past 12 months, data center REITs with U.S. exposure, such as COR, CONE and DLR have underperformed the broad equity market, in part because of the rising interest rate cycle in the United States. In contrast, the European-centric INXN has outperformed the S&P 500 by about 12%.