New
Data Center Stocks Are Plunging -- Here's Why
The stock market was having a rough day on Monday, with the S&P 500 (SNPINDEX: ^GSPC) benchmark index down by about 1.7% at 11 a.m. ET. However, real estate was one of the biggest exceptions, with the Vanguard Real Estate ETF (NYSEMKT: VNQ) slightly higher for the day. In simple terms, Treasury yields are under pressure, which is generally a positive catalyst for real estate stocks.
However, not all real estate stocks were performing well. Data center giants Equinix (NASDAQ: EQIX) and Digital Realty Trust (NYSE: DLR) were lower by 7% and 12%, respectively, and records storage real estate investment trust (REIT) Iron Mountain (NYSE: IRM) was down by more than 8%.
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Data centers are very dependent on AI investment
Before we go any further, let's just recap why the market is falling on Monday. The biggest headline is that China-based start-up DeepSeek launched a large language model (LLM) in December that was developed in (as claimed by the company) two months at a cost of under $6 million. The same company just released a reasoning model that is outperforming OpenAI's equivalent in certain third-party tests.
U.S. companies -- especially the tech giants -- have been investing many billions of dollars in artificial intelligence (AI) in recent years. And one of the big areas where they have been spending money is on data centers.
Specifically, spending has been focused on graphics processing units (GPUs), specifically those sold by chipmaking giant Nvidia (NASDAQ: NVDA). This is why Nvidia is down by nearly 15% on the news. But the key point to keep in mind is that the GPUs being purchased need to physically live somewhere, and that's where data centers come in. In short, the AI boom has created a surge in demand for data centers.
Equinix and Digital Realty are the clear leaders in the data center REIT industry. Equinix data centers in particular are often regarded as hubs for the internet -- in fact, other operators often build data centers in specific locations because of their proximity to Equinix data centers. Iron Mountain, on the other hand, has traditionally focused on paper records storage, but has gradually been shifting its focus to digital records. And a big way that it has been doing this has been building out data centers.
Is this a buying opportunity?
The reason why these stocks are being beaten down is that the DeepSeek news is causing investors to question how much money is being invested in AI hardware and data centers.
To be clear, nothing has happened yet to indicate that any big tech companies are actually pulling back on spending in a meaningful way. It's also important to mention that several key analysts are skeptical that DeepSeek actually spent less than $6 million to build its tool.
Finally, it's worth noting that this could also have the opposite effect of causing tech giants to spend more money, as the race to AI dominance appears even more urgent now. There's the recent announcement of the $500 billion Stargate AI project to keep in mind, and it could be more important than ever to maintain access to the best AI chips in the United States. If today's panic ends up being overblown, it could be a good opportunity to buy these three well-run REITs at a rare discount.
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Matt Frankel has positions in Digital Realty Trust and Vanguard Real Estate ETF. The Motley Fool has positions in and recommends Digital Realty Trust, Equinix, Nvidia, and Vanguard Real Estate ETF. The Motley Fool recommends Iron Mountain. The Motley Fool has a disclosure policy.
