Company Reports

NextDC’s first-half fiscal 2024 result highlighted a huge wall of customer demand, with customers now discussing larger opportunities than only a few years ago. Previously, it discussed 10-15 megawatt opportunities with customers, but it now discusses opportunities of more than 100 MW. Base-level demand from cloud computing is very strong, with customers discussing demand in 50 MW to 100 MW increments. The potential demand from artificial intelligence could be three to five times larger than this, coming from AI model training and inference. There is not enough supply at scale in the market to meet this demand, with management describing the urgency to deliver the planned capacity of its two Sydney data centers, S4 (targeted 300 MW capacity) and S5 (targeted 60 MW capacity), as critical. With such strong demand, NextDC sees per-unit pricing increasing, with annualized revenue per square meter and per MW reaching record levels in first half 2024.

NextDC has a big opportunity in front of it, with ample room to increase its data center footprint within Australia and the Asia-Pacific region, and reap the financial benefits that its larger scale should provide. The firm is already a primary provider of cloud on ramps to the biggest global cloud providers, and we expect the firm’s importance for cloud connectivity in Australia to grow.

The broad market decline and pressure on real estate investments resulting from higher interest rates both pressured NextDC’s stock during 2022. Unlike most REITs, however, NextDC does not pay a dividend, so it has not been a stock in which to hide amid low interest rates. Instead, it is a growth stock, and we think it has a very manageable debt profile, with a leverage ratio below most data center peers. The stock only trades at a 17% discount to our AUD 11 fair value estimate, but we think it is worthwhile for investors who want exposure to the Australia data center market.

With NextDC’s stock briefly touching 4-star territory recently based on our AUD 11 fair value estimate, we think it should be on investors’ radar should a further pullback occur. The broader environment for data centres and the consolidation of many smaller competitors—similar to NextDC—lead us to bring our uncertainty rating down to medium, and we believe the stock has a floor under which its stock price is unlikely to persist.

NextDC’s fiscal first-half revenue and EBITDA came in higher than we anticipated, and significant margin expansion showcases the operating leverage we believe it has as it increases capacity and utilization in its data centres. The firm is on track with the near-term projects that should be completed over the next year and continues to successfully lease new space. With nothing to change our long-term thesis, we are maintaining our AUD 11 fair value estimate.

We’re raising our fair value estimate for NextDC to AUD 11 from AUD 10.85 after refining our long-term forecast to reflect the firm’s publicly-stated long-range plans, which now include a fourth data centre in Sydney. The minimal change to our fair value estimate results from significantly higher capital spending largely offsetting more favorable projections for long-term sales growth and margin expansion.

NextDC is well-placed to benefit from industry megatrends, including the growing adoption of cloud computing, the Internet of Things, and artificial intelligence, leading to exponential growth in data creation. We forecast NextDC will materially expand its capacity over our 10-year forecast period in order to meet growing demand for data center services.

We maintain our AUD 10.85 fair value estimate for no-moat NextDC following the release of fiscal 2021 results. Underlying EBITDA increased 29% to AUD 135 million, broadly in line with our forecasts. The result was underpinned by strong customer billing growth and improved operating leverage. We expect the COVID-19 pandemic has accelerated the digital transformation of many businesses, expediting the shift to hybrid cloud solutions and benefiting co-location providers like NextDC. To meet growing demand, NextDC continued to expand. Built capacity increased 22% to 96MW in the year with approximately 79% contracted. At current prices, NextDC screens as overvalued, trading at an 18% premium to our fair value estimate.

NextDC is well placed to benefit from industry megatrends including the growing adoption of cloud computing, the Internet of Things and artificial intelligence, leading to exponential growth in data creation. We forecast NextDC will materially expand its capacity over our 10-year forecast period in order to meet growing demand for data centre services.

No-moat NextDC announced plans to expand capacity through development of a massive wholesale scale colocation data centre in Western Sydney. The company purchased a site for AUD 124 million to accommodate a data centre with about 300MW of capacity. The capacity of this one proposed facility exceeds NextDC's total capacity built and in the pipeline of 246MW as of first half fiscal 2021. We expect this expansion is underpinned by strong demand from hyperscale cloud providers for additional data storage space over the next decade and additional availability zones.

We maintain our AUD 10.85 fair value estimate for no-moat NextDC on tempered profit forecasts offset by time value of money. We continue to expect NextDC to gradually improve profitability through mix shift toward higher margin interconnection revenue and improved operating leverage, albeit at a marginally lower rate than previously forecast to better align with comparable peers. At the current share price, NextDC screens as overvalued trading at a 16% premium to our fair value estimate.

NextDC is well placed to benefit from industry megatrends including the growing adoption of cloud computing, the Internet of Things and artificial intelligence, leading to exponential growth in data creation. We forecast NextDC will materially expand its capacity over our 10-year forecast period in order to meet growing demand for data centre services.

NextDC is well placed to benefit from industry megatrends including the growing adoption of cloud computing, the Internet of things and artificial intelligence, leading to exponential growth in data creation. We forecast NextDC will materially expand its capacity over our 10-year forecast period in order to meet growing demand for data centre services.

No-moat NextDC is trading in line with our AUD 10.85 per share fair value estimate. We have revised our long-term power efficiency of data storage and power density of storage racks assumptions; however, the changes are offsetting and our fair value estimate is unchanged. We now expect more rapid technological advancement to reduce the required data centre capacity, resulting in lower revenue growth. However, this valuation headwind is offset by lower future capital expenditure. In practice, we expect NextDC to build less data centre capacity than previously forecast to meet the exponential growth in data storage demand.

NextDC is well placed to benefit from industry megatrends including the growing adoption of cloud computing, the Internet of things and artificial intelligence, leading to exponential growth in data creation. We forecast NextDC will materially expand its capacity over our 10-year forecast period in order to meet growing demand for data centre services.