Data center stocks crashed 18% as Wall Street discovers AI bubble fears
- Tanzeel Kamal
- 60 minutes ago
- 3 min read
The great data center collapse nobody saw coming until Microsoft pulled back
Wall Street's hottest real estate play turned ice cold in 2025 as data center REITs experienced violent whiplash from March's Microsoft spending fears through summer's brief recovery into year-end AI bubble panic, with Digital Realty plunging 12% and Equinix cratering 18% despite tech giants supposedly needing infinite infrastructure for their AI ambitions. Mizuho analyst Vikram Malhotra frames the existential question facing investors: whether 2026 brings genuine capex rationalization that destroys the investment thesis or unfounded fears that create buying opportunity before the next wave of gigawatt-scale facilities. The market's schizophrenia reflects deeper uncertainty about AI's economic reality—these REITs need hyperscalers like Microsoft, Google, and Amazon to maintain their astronomical spending trajectories, but whispers of pullbacks sent shockwaves through valuations as investors realized the entire sector depends on tech companies continuing to burn cash at unprecedented rates. Digital Realty specifically needs to demonstrate massive AI compute bookings to restore confidence, while simultaneously proving their enterprise cloud contracts can deliver high single-digit earnings growth independent of hyperscaler volatility.
Equinix becomes the strangest hedge against total AI collapse
The fascinating paradox Malhotra identifies centers on Equinix's dual nature as both AI inference play and traditional cloud stalwart, creating what might be the market's most asymmetric risk-reward setup heading into 2026. Consider the bull-bear dynamics at play:
Bull scenario sees inference workloads exploding across Equinix's globally distributed footprint as AI applications move from training to deployment phase, requiring edge computing infrastructure closer to end users rather than centralized training clusters, potentially driving explosive growth as every enterprise needs local AI processing capability for real-time applications while maintaining data sovereignty compliance across jurisdictions.
Bear scenario where complete AI bubble burst occurs still leaves Equinix relatively protected since 95% of revenue derives from traditional cloud interconnection services that predated the AI boom, meaning cash flows remain stable even if multiples compress from lost AI premium, creating downside protection most pure-play AI investments lack entirely while maintaining optionality for inference upside should practical applications emerge.
The critical insight:
"It reminds me of sort of iPhone one versus iPhone 17—there were fits and starts, but ultimately there's a lot of work to be done in foundational models"
suggests markets are mispricing the infrastructure needs by focusing on near-term spending volatility rather than decade-long compute requirements.
The booking numbers that will determine whether data centers live or die
Digital Realty's salvation hinges on delivering what Malhotra calls the big bookings number—concrete hyperscaler commitments for new AI compute capacity that prove the infrastructure buildout continues despite bubble fears, with analysts watching for validation that foundational model development requires exponentially more compute power regardless of short-term ROI concerns. The stakes couldn't be higher as these REITs burned through investor goodwill promising AI-driven growth that hasn't materialized in earnings, leaving them vulnerable to any sign of hyperscaler hesitation while traditional metrics like funds from operations get ignored in favor of speculative capacity expansion narratives. Markets desperately need evidence that enterprise AI adoption drives sustainable demand beyond hyperscaler training runs, with Digital Realty's shorter-duration enterprise contracts serving as the canary indicating whether businesses actually deploy AI at scale or merely experiment with ChatGPT wrappers. The brutal reality: without high single to low double-digit earnings growth materializing soon, these stocks remain hostage to every hyperscaler earnings call where executives might hint at moderating capex, creating quarterly volatility nightmares for investors seeking stable REIT income.