On July 28, 2023, Digital Realty Trust Inc (DLR, Financial) saw a daily gain of 6.5%, with its Earnings Per Share (EPS) standing at $1.12. The question that arises is whether this stock is modestly undervalued. This article explores this question, providing a comprehensive valuation analysis of DLR. Continue reading to gain valuable insights into the value of Digital Realty Trust.
Introduction to Digital Realty Trust Inc (DLR, Financial)
Digital Realty Trust owns and operates over 300 data centers worldwide, offering a range of services to enterprises and cloud service providers. With nearly 40 million rentable square feet across five continents, Digital Realty Trust has evolved from providing 'cold shells' to offering higher-level services to tenants outsourcing their IT needs. The company operates as a real estate investment trust. At present, Digital Realty Trust (DLR) trades at $122.64 per share, with a market cap of $35.7 billion. The estimated fair value (GF Value) stands at $160.37, suggesting that the stock may be modestly undervalued.
Understanding the GF Value of Digital Realty Trust
The GF Value is a unique measure of a stock's intrinsic value, including historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line indicates the ideal trading value of the stock. If the stock price significantly exceeds the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Based on the GuruFocus Value calculation, Digital Realty Trust (DLR, Financial) appears to be modestly undervalued. With its current price of $122.64 per share and a market cap of $35.7 billion, the stock seems to offer a higher long-term return than its business growth, considering its relative undervaluation.
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Financial Strength of Digital Realty Trust
Investing in companies with poor financial strength exposes investors to a high risk of permanent capital loss. To mitigate this risk, it is crucial to review a company's financial strength before purchasing shares. The cash-to-debt ratio and interest coverage are reliable indicators of financial strength. With a cash-to-debt ratio of 0.01, Digital Realty Trust ranks lower than 86.07% of companies in the REITs industry, suggesting poor financial strength.
Profitability and Growth of Digital Realty Trust
Investing in profitable companies typically carries less risk. Digital Realty Trust has been profitable 10 years over the past 10 years, with revenues of $4.9 billion and an EPS of $1.12 in the past 12 months. However, its operating margin of 14.24% is lower than 86.96% of companies in the REITs industry, indicating fair profitability.
Growth is a crucial factor in the valuation of a company. Companies that grow faster create more value for shareholders, especially if that growth is profitable. Digital Realty Trust's average annual revenue growth is 0.9%, ranking better than 50.47% of companies in the REITs industry. However, its 3-year average EBITDA growth is -8.9%, which ranks lower than 74.32% of companies in the REITs industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to the weighted average cost of capital (WACC) is another way to determine its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. When ROIC is higher than WACC, it implies the company is creating value for shareholders. For the past 12 months, Digital Realty Trust's ROIC is 1.58, and its WACC is 7.06.
Conclusion
In conclusion, the stock of Digital Realty Trust appears to be modestly undervalued. The company's financial condition is poor, and its profitability is fair. Its growth ranks lower than 74.32% of companies in the REITs industry. To learn more about Digital Realty Trust stock, you can check out its 30-Year Financials here.
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