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Why the Nextdc Ltd share price is rocketing today

The Nextdc Ltd (ASX: NXT) share price has surged 27% since the data centre operator impressed the market with its half-year profit result for the period ending December 31 2016.

The share price’s scintillating performance contrasts with several other highly-rated tech stocks that plunged in value recently after delivering disappointing updates. The relative underperformers include the likes of Altium Limited (ASX: ALU), iSentia Group Ltd (ASX: ISD) and rival data centre operator Vocus Communications Limited (ASX: VOC).

For its recent half-year Nextdc reported revenue up 39% to $58.7 million and a profit of $8 million as it continues to invest in multiple new data centres across Sydney, Brisbane and Melbourne. It’s no secret that demand for cloud services (or online data storage at data centres) is booming and Nextdc’s share price has doubled over the past five years to sell for $4.02 today.

For the full year the group is guiding for EBITDA of $46 million to $50 million on revenues of $115 million to $122 million, with total ongoing capital expenditure (to upgrade and construct new data centres) between $260 million to $340 million.

The giant capex means Nextdc is an ongoing growth story, although with a market value around $1.1 billion it’s not as though this has escaped the market’s attention.

In my opinion the company has a positive future, but the stock looks fully valued given the current financials and substantial risks around whether it can generate a decent return on its capital investments.

Analysts’ estimates for around 6 cents in earnings per share in FY 2017 mean it trades on an estimated 67x forward earnings, which puts into perspective the rich valuation.

If you want to take advantage of the digital future why not look to Australia’s leading data centre provider in Vocus Communications Limited (ASX: VOC)? In comparison at $4.45, Vocus trades on a cheap 13.5x analysts’ estimates for 33 cents in earnings per shares in FY 2017, with a fully franked yield around 3%.

Vocus also boasts a strongly performing corporate dark fibre business that could see it generate strong growth in the years ahead. Its operations in New Zealand are also performing well with the potential for it to generate blockbuster long-term returns from capital investments it is making on trans-continental fibre-cable data transmission projects.

In my opinion Nextdc looks a hold, whereas Vocus looks a strong buy, but if you’re looking for a monster dividend stock on an attractive valuation read on below….

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Motley Fool contributor Tom Richardson owns shares of Vocus Communications Limited.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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