Digital Realty Trust's Share Price Hits Peak, Investors Must Sell

The corporate world is heavily investing in the cloud, and that has implications for investors in cloud stocks. This one you should avoid.

On Tuesday, executives at FedEx Corp. (FDX) announced that the logistics giant would close all of its data centers and move completely to the public cloud. This shift could save $400 million per year.

Investors should unload shares of Digital Realty Trust (DLR).

For more than a decade, corporations have been moving to cloud-based computing and data storage. The biggest companies are now closing their proprietary data centers, or the space they lease from others, in favor of the public cloud.

The transition is a major benefit for Amazon.com (AMZN), Microsoft (MSFT) and Alphabet (GOOGL). As the three biggest public cloud players, these tech giants are poised to gain substantially.

The cloud is ultimately about scale, streamlining costs and eliminating monolithic applications.

At FedEx's investor day, the company's chief information officer Robert Carter told analysts that the Memphis, Tenn.-based business is moving quickly to a zero data center and zero mainframe structure. This will drastically reduce hardware upgrade cycles and labor costs, helping the company build applications faster.

A data center tracking firm, says that FedEx operates a single facility in Colorado Springs at present. The center was finished in 2008 and expanded three years later, with a 26,000 square foot addition in 2021.

Analysts at Morgan Stanley believe that the current cloud market is overbuilt, and that revenues have been pulled forward due to the pandemic. However, FedEx was already shifting to the cloud long before that event. Cost-cutting is driving this shift, and bigger corporations are even closing their colocation facilities.

In April, Gartner

Amazon Web Services, a hyperscale data center network, has tremendous economies of scale advantages. They can buy the newest hardware at huge discounts to their smaller competitors and also have in place vibrant third-party developer ecosystems.

The big three will likely take advantage of their advantages to the detriment of firms like Digital Realty Trust (DLR), which owns data centers.

REITs are corporations that own properties that generate income. REITs must have at least 100 shareholders, and 90% of their taxable income must be distributed to these investors. In return, the trusts receive tax benefits.

During the pandemic, many companies initially sought colocation at data centers. In 2020, Digital Realty closed an $8.4 billion acquisition of Interxion, Europe's largest provider of digital services in colocation. The deal expanded its overall business footprint to 267 data centers in 20 countries.

As customers are increasingly choosing to store their data in the cloud, colocation facilities are at risk.

In an interview with the Financial Times, Jim Chanos, a noted short seller, cited this as technical obsolescence. He explained that value was accruing to the cloud companies, not the bricks&mortar legacy data centers because of this development.

The big three will continue to out-innovate, outspend, and steal business from Digital Realty. The company’s profits and dividends will be squeezed as a result.

The current dividend for shares is only 3.8%. That number is just barely competitive with the 3.0% yield of the 10-year Treasury Bond, and it certainly doesn't compare to what investors can expect in the future: lower dividends.

The writing is on the wall. As corporations like FedEx fully embrace cloud computing, it's time for investors to exit legacy players like Digital Realty.

If you want to learn how to improve your results in the market by purchasing options on stocks like Ford and Tesla, subscribe to my special newsletter, Tactical Options:Click here. Members have made more than 5x their money this year.