Agentic AI Demand Boosts DLR Interconnection, But Valuation Remains Stretched

What happened

Digital Realty's CFO Matt Mercier stated that early agentic AI workloads are driving record activity in smaller deployments, cross-connects, and connectivity products. This suggests broadening demand beyond hyperscale into colocation and interconnection services, which typically carry higher margins and stickier revenue. However, the announcement is qualitative and lacks specific metrics, so its impact on near-term financials is uncertain, especially given DLR's existing backlog and renewal spread guidance. The stock has already rallied 39% over the past year to $203.60, leaving no margin of safety per the latest master report, with a WAIT rating and trim above $220. Investors should monitor whether this interconnection strength translates into improved same-store growth or pricing, which would be needed to justify the current valuation.

Implication

Over the next 3-6 months, watch for DLR's quarterly disclosures on cross-connect and interconnection revenue growth, as well as any impact on overall same-capital NOI. If the trend is real and sustainable, it could support a higher multiple for the colocation segment, but given the stock's valuation and leverage, we maintain a cautious stance and would wait for a pullback to $175 or clear execution on backlog conversion before considering entry.

Thesis delta

The emergence of agentic AI-driven interconnection demand adds a potential incremental revenue driver, but the news is qualitative and unquantified. It does not alter the core thesis that DLR is fully valued at $203.60 with execution risk on backlog conversion and funding. We maintain WAIT, but would reassess if upcoming reports show tangible growth in connectivity revenue.