Should you invest in data centre stocks?

Summary

• Data centres act as a backbone to data inflow and are essential in the current digital economy.
• The data centre market worldwide is expected to grow at a CAGR of ~13% from 2021 to 2028.
• The 5G rollout would have a direct impact on allied services, including data centres.
• Companies in the data centre space are expected to adopt technologies that support 5G.

Data has become an integral component of the current global digital economy, driving several industrial events right from retail & manufacturing to infrastructure & transport. A data centre plays an important role here and acts as a backbone to the data inflow. Data centres played an essential role during the COVID-19 pandemic and are expected to continue doing so. The data centre market is expected to grow at a CAGR of over 13% during 2021-2028, crossing the US$117 billion mark by 2028.

A key factor contributing to the market growth is that various small businesses and cloud service providers are moving towards multi-tenant data centres. Generally, companies opt for colocation as it has cost benefits compared to building and maintaining their own data centres.

Experts believe that the significant growth in online shopping would also help maintain the market growth in the coming years.

Investing in Data Centres

Before investing in data centre stocks, one must acclimatise with the industry and how it works. A data centre is a facility that concentrates the shared IT operations and devices for storing, processing & distributing data and applications.

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A data centre can be classified into two divisions:

1. Data centre companies that operate & house the software as well as physical hardware to store information.
2. Data centre REITs (real estate investment trusts): These companies spend in data centre businesses.

Those investors who want to have better exposure to data centres invest in data centre REITs. Some data centres even provide investors with exposure to hundreds of data centres at the same time.

Data centre REIT are investment trusts where most of the trust’s revenues come from leasing data centres.

What drove the data centre market in 2020?

The rise in digitisation and cloud computing in 2020  was the prime reason for steady growth in 2020. The sudden switch to remote working system gave a sudden boost in the data centre industry as there was a drastic increase in individual demand.

Gartner predicts that there would be a 6% increase in end-user spending in 2021 than 2020. Gartner also highlighted that in 2020, due to restricted cash flow due to the COVID-19 pandemic, data centre spending declined by 10.3%. Despite these challenges, the industry would grow YoY through 2024.

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Trends that could shape the data centre industry in the future

Companies adjust to a New IT Landscape

Data centre infrastructure played a key role in 2020 in driving the digital economy. This was visible people used cloud technology to survive during the pandemic period. The current trends are likely to continue in the second half of 2021 as the world gradually comes out from the COVID-19 pandemic and goes back to normal.

However,  we have also seen new variants of this deadly virus that might have a significant impact. Hence, three key factors -  flexibility, adaptability, and resilience - would matter a great deal in the upcoming period.

Sustainability

The huge energy footprint of cloud computing would allow the data centre to run a global movement to renewably fuelled business. Now customers are also looking for accountability on climate impact.

Creation of data centre capacity

Three key factors that would set new rules for deploying data centre capacity include size, speed, and efficiency. Hence, to cope up with this challenge with deep reservoirs of innovation and financial strength.

Automation

The rapid adoption of data centre automation would enter a new stage in which automation and robotics would have a critical role to play a bigger role in facility management.  COVID-19 pandemic has fast-tracked the requirement to make less dependent on human. This would stop the spread of the infection amongst the operations team and pursue contactless maintenance.

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What changes can we expect in the new 5G world?

Many countries around the world are now working towards the rollout of 5G. The 5G rollout would have a domino effect on the existing infrastructure as well as on new investments, especially in terms of the data centre.

Hence, we might expect that there would be changes in terms of network upgradation and changes in switching and routers required for 5G. The new technology would bring opportunities for both new and existing data centres. Hence, we may see the data centre businesses rethink the direction of the structure of the data centre.

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