NextDC (ASX: NXT) is a data center operator riding a massive cloud/digitization wave for the past decade. Over the past decade, the company has grown tremendously as businesses of all sizes moved from on-premises computing to cloud service providers like AWS, Oracle, Microsoft Azure, and Google Cloud.
This trend was accelerated during the COVID pandemic, forcing businesses to move even more to the cloud and even more so with the onset of Generative AI.
The events of the past couple of years have shown that Generative AI is here to stay and get bigger with the new capabilities and products it will make a reality. NextDC is a direct proxy to play this megatrend.
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About NextDC
NextDC (ASX: NXT) is a leading Australian data center operator, established in May 2010 by Bevan Slattery and headquartered in Brisbane, Queensland. It is Australia’s largest listed developer and operator of data centers, with 16 facilities across major cities including Melbourne, Sydney, Brisbane, Perth, and Canberra. The company additionally has two data centers under development and another 8 under planning across ANZ and Asia.
Source – FY24 Investor Presentation
The company specializes in colocation services, cloud connectivity, and managed services, providing businesses with secure and reliable IT infrastructure solutions. NextDC operates a portfolio of Type IV-certified data centers (ensuring 100% uptime) and is the only operator in Australia with Nvidia DGX AI Factory certification.
At the time of writing, NextDC has a market capitalization of A$9.85 billion.
Strong Market Position and Tailwinds Are Strengths
NextDC’s (ASX: NXT) major strength is its strong market position in Australia’s nearly A$4.8 billion digital infrastructure market. The company enjoys nearly 10% market share in a very competitive market and has enjoyed the highest NPS score in the Data Center Services Provider category.
NextDC’s business model generates two sources of revenue for the company – net revenue from leasing out data center space measured in server racks along with MWs consumed, and interconnect charges (revenues from providing high bandwidth direct fiber connections between data centers in Australia).
NextDC is the first operator in the ANZ region to get Nvidia’s coveted AI Factory certification for its new Sydney facility, making it a go-to provider to hyperscalers and large cloud clients. The company’s facilities offer 15 on-ramps (direct connection to hyper scaler networks bypassing local internet) and access to Australia’s fiber network across its 16 operational data centers.
This is best showcased by the fact that in FY24, the company clocked contracted utilization rates of 105% of its built capacity.
NextDC also has years of experience in ancillary trends such as liquid cooling of all varieties such as direct-to-chip and full immersion, which is a key requirement of high-performance computing that powers AI.
AI is expected to drive a colossal boom in data center demand, which is expected to nearly triple from 60GW now to north of 200GW by the end of the decade, as per McKinsey.
Source – FY24 Investor Presentation
Such is the demand that customers have already blocked all the company’s built capacity despite currently utilizing only half their contracted capacity.
The company also enjoys some added revenue stability as it is a key host to the Australian government’s public/sovereign cloud. Also, as the only major pure-play data center operator in Australia that is locally owned, it will enjoy a strong position in the country’s digitization and AI policies.
Capital Intensity of Growth Is A Weakness
NextDC (ASX: NXT) suffers from a growth funding weakness, due to heavy reliance on share sales and debt. While the company is very placed to grow from sector tailwinds, the expected growth of the sector has called for breakneck growth which calls for significant capital expenditure.
Although the company has strong operations, the rate of investment required to capitalize on the current boom in data centers meaningfully outstrips the company’s cash flow generation.
As a result, the company has had to rely on follow-on share issues and placements to fund its growth investments. The group recently placed A$550 million to institutions and about $200 million in a rights issue to existing investors.
The company will also see increased leverage from the present A$1.4 billion of drawn credit and the use of a recently negotiated A$2.9 billion undrawn credit facility.
This shows that shareholders will have to run the risk of dilution of their holdings and added risk from higher leverage to benefit from this growth opportunity.
However, upon shareholder request, the company is weighing offering a great component of rights issues for raises going forward to be fair to existing investors and making rights tradable for those without liquidity or desire to buy new shares.
Net-Zero, AI Applications, And International Expansion Are Opportunities
NextDC (ASX: NXT) has some very high potential opportunities lying ahead in terms of net zero, efficiency, and international expansion.
For starters, Australia is massively endowed with renewable energy resources such as solar, which presents a major opportunity for players like NextDC.
This presents a big opportunity for the company as AI data centers have a massive emissions problem. This is due to the power-intensive nature of AI LLMs (Large Language Models), which consume up to ten times more energy per query than a search engine does.
Source – FY24 Investor Presentation
Over the next decade, data center share in global power consumption will double and climate impact is already a concern for Big Tech with companies like Microsoft resorting even to nuclear options to power data centers.
Given Australia’s massive land mass and solar intensity, NextDC has a big opportunity to move towards zero-emission computing, especially with policies and investments that Australia is making in solar, battery storage, and hydrogen.
Second, the company is now actively developing use cases of AI in its own business to improve operations. AI can be used by personnel for rapid and accurate troubleshooting across the company sites.
The company is also using AI to create digital twins of its data centers, allowing NextDC to make very accurate simulations of compute management, power draw, cooling requirements, data movement, etc. which could meaningfully improve efficiency and margins.
Lastly, a major opportunity for the company is its ongoing Asia expansion. With AI’s disruptive potential, all countries are interested in local infrastructure to support their technological efforts.
Even ex-China, Asian data center capacity is slated to more than double by the end of the decade due to AI and cloud demand. With NextDC’s technical experience and strong relations with hyperscalers, this presents a significant opportunity.
NextDC is already building capacity in Kuala Lumpur and Auckland, while it is in the planning for investments in Tokyo and Bangkok.
Technological Disruption Is A Threat
A major threat facing NextDC (ASX: NXT) is a technical disruption in AI development. A recent breakthrough from an unknown firm for China in building an AI model called DeepSeek has shaken the entire sector.
The launch of DeepSeek and the market turmoil that followed have led investors all over the world to question the strong assumptions that drove this bull run to astronomical valuations.
DeepSeek’s ability to deliver accurate results using far lower resources has questioned the assumption that future models will require ever-increasing computational power and resources.
A serious threat over the short to medium term for companies like NextDC is that software breakthroughs in AI could change demand-supply dynamics for resources almost overnight.
However, over the long term, these breakthroughs are crucial developments required to make AI more functional and economical, despite the potential volatility that they may cause.
NextDC Financials
In FY 23-24, NextDC (ASX: NXT) reported solid financial performance. The company reported 10% net revenue growth to A$307.9 million and EBITDA of A$204.3 million (up 5.3% YoY). The company was impacted by higher costs it expects to moderate over the year.
Source – FY24 Investor Presentation
However, NextDC reported nearly 11% growth in revenue per square meter, showing higher sales intensity of newer advanced data centers while contracted utilization jumped from 92% to 105%, reflecting strong demand.
At the same time, the company added nearly 24% to its built capacity over the year, taking the total built capacity to 165.1MW. The company has another 72MW in progress and another 50 MW of capacity planned.
The company sold a record 50+ MW in FY24 and has contracted an additional 86MW that will show in revenues through FY25 and FY26.
For FY25, the company projects net revenue of between A$340 million and A$350 million, representing growth of between 10.4% and 13.6% while EBITDA is expected to be in the range of A$210 million – A$220 million, representing growth of between 2.7% to 7.6%.
Capital Expenditure is expected to be between A$900 million to A$1.1 billion, down 10%/up 10% YoY.
The company’s modest margin expansion guidance is due to aggressive investments in growth, personnel, and operations, but is expected to accelerate meaningfully when operating leverage starts kicking in by FY26.
Morgan Stanley has recently commenced coverage on the stock, with a target of A$20/share, representing an upside of greater than 25%.
NextDC Valuation
Since NextDC (ASX: NXT) has no meaningful direct competitors in Australia, we will be comparing it to American counterparts Equinix (NASDAQ: EQIX) and Digital Realty Trust (NYSE: DLR).
As you can see, NextDC is most reasonable in terms of Price/Book, which is a good sign in asset-heavy industries. Its operating margin lies in the middle of both its much larger competitors despite their scale advantage.
Lastly, it is the fastest grower in terms of both EPS and sales over the past 5 years. Hence, the company should be a great investment once its operating leverage starts kicking in over the next couple of years.
NextDC – A Proxy For Playing AI
NextDC (ASX: NXT) has enjoyed strong valuation and sales performance on the back of AI demand and a valuation re-rating due to Blackstone’s acquisition of local rival Airtrunk.
The company has a solid business with modest leverage and high demand over the next few years. NextDC is poised to see significant gains from operating leverage once this investment cycle is over.
Its expertise, infrastructure, and scale give it meaningful advantages in getting and keeping business from big clients such as Hyperscalers while not facing technical disruption risk to the same extent as other AI investments due to the contracted nature of capacity.
Overall, it is a solid growth play in a megatrend sector at a reasonable valuation given its scope for growth and margin expansion over the next few years.
