MENU

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.

Tech stocks are often subject to stormy valuations given the exciting (and often revolutionary) nature of their products, which can make it even more difficult for investors like you and I to see the wood from the trees.

We’re now midway through the second decade of the 21st century, and if anything the speed of technological growth has accelerated, making your new gadgets and software outdated almost as soon as you buy them.

That’s where The Motley Fool comes in, having done all the legwork for you in its first special video report on the technology arms race you can’t afford to miss.

Interested investors should click on the link below and enter your email address – it takes less than 30 seconds – and you’ll be automatically directed to the report, absolutely FREE.

The Motley Fool's #1 ASX tech pick...

Attention investors: The Motley Fool has just released a special video report on our analysts' #1 ASX tech pick -- all about the one Australian company poised to win big from the 'cloud computing' trend. (Hint: The shares are already up over 100%!) Click here to claim your FREE copy.

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

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.