Nextdc Ltd falls as excitement wears off: Should you buy?

Late last month I covered Australian data centre provider Nextdc Ltd (ASX: NXT) and said that the company looked likely to make a successful leap to profitability in 2015.

Investors clearly agreed with me, with the share price rising over 10% in the days before its results report was released, and a further 10% right afterwards.

However the share price has since fallen as low as $1.62 last Thursday and now trades around $1.70.

Given a highly constructive 2014 and the transition to modest profitability in 2015, do the recent falls in price represent an opportunity to buy Nextdc?

Here’s a quick recap of some of the highlights from last year:

  • All five primary data centres established
  • Annualised contract revenue rose 36% to $41.7m million
  • Customer utilisation up 22% to 11.9MW
  • Sydney and Melbourne data centres certified ISO27001, allowing Nextdc to bid for government contracts
  • Revenue expected to be between $51-55 million in 2015

Based on an anticipated fixed costs figure of $44-46.5 million, I estimate Nextdc might earn somewhere in the vicinity of $5-10 million profit in 2015, meaning it still looks fairly expensive on a current P/E ratio.

Unless those costs can be substantially reduced over time (doubtful owing to the fixed nature of the business), or growth continues at its current rate for several years, the first year of profitability is unlikely to cause much of a change in Nextdc’s value.

While it seems likely that growth will continue for several years, there are a number of strong risks associated with Nextdc which are enough to turn me off the data centre operator.

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Motley Fool contributor Sean O'Neill doesn't own shares in Nextdc Ltd.

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