This Real Estate Company Is Becoming a Modern-Day Shovel-Seller to the AI Sector. Here's Why Investors Should Pay Attention.

There is a building boom right now around artificia-intelligence (AI) infrastructure. The poster child for the fast-growing technology is Nvidia (NVDA +5.82%), but it is just one very-public example of what AI needs to “live.” Here’s why long-term income investors might prefer to own real estate investment trust (REIT) Digital Realty (DLR 0.40%).

Nvidia has a supply/demand problem

Nvidia makes the extremely powerful computer chips that are the brains of artificial intelligence. Investors seem to believe that the AI building boom that’s taking place right now will keep going forever. (The stock is up more than 23,000% over the past decade!) That’s possible, but the history of market bubbles suggests that this tree, like all of the others before it, will not grow to the sky.

Indeed, with a price-to-earnings ratio of 53 times, investors are pricing in a lot of good news. There’s not a lot of room for error in Nvidia’s valuation here. But eventually, the excitement around AI will lead to overbuilding. And when that happens, Nvidia is probably going to see demand cool off. Investors, if history is any guide, will view a slowdown in demand as a huge negative and the stock price will collapse. That could happen even if the company continues to perform fairly well as a business. Emotions are really driving the show right now.

But there’s an interesting thing to consider with the AI buildout. The computers that use Nvidia chips have to be housed somewhere. That “somewhere” is often a data center. That’s a building that is specifically designed to house computers. This is the type of property on which REIT Digital Realty is focused.

Digital Realty has a different business dynamic

The key takeaway here is that a decline in the demand for chips will lead to a drop in Nvidia’s revenue. But every new data center built will still exist if demand for AI chips falls. In fact, overbuilding of AI infrastructure could actually help Digital Realty. When the internet buildout got overheated, the excess capacity resulted in lower costs for companies looking to use what was new technology at the time. If the same thing happens with AI, which is highly likely, infrastructure overbuilding will mean more demand for the AI that is housed in Digital Realty’s properties.

Digital Realty currently owns over 300 data centers. But the real story here is diversification, because those data centers are spread across the world, with properties in North America, South America, Europe, Asia, and the Middle East. The company has more than 5,000 customers. While Digital Realty may find that building new data centers isn’t as great an opportunity if there is an AI bust, it seems highly likely that the current portfolio will continue to generate reliable rental income.

That said, while the AI infrastructure boom is ongoing, Digital Realty is going to participate. Right now, it has around 2.8 gigawatts of capacity in place with its current property portfolio. But the company has enough land to build 4.3 gigawatts of additional capacity. So there’s ample room for the REIT to keep growing, with each new data center adding to the cash flow-generating potential of the business over the long term.

Digital Realty isn’t cheap

Wall Street isn’t ignorant to the opportunity Digital Realty has ahead of it. That’s why the dividend yield here is 2.9% or so, which is well below the REIT average of nearly 3.9%. However, if you are looking for a way to invest in the AI infrastructure boom, this REIT could be a good compromise between risk and reward, with a healthy income stream thrown in for good measure.