Although the Nextdc Ltd (ASX: NXT) share price has stormed higher by almost 29% since the start of 2017, I think the data centre operator remains a great option for investors willing to make a buy and hold investment.
Whether it is doing your accounts with XERO FPO NZX (ASX: XRO), organising your logistics with WiseTech Global Ltd (ASX: WTC), or watching your favourite TV show on Netflix, these days more and more data is going between consumers, businesses, and the cloud.
The growing demands of cloud computing is music to the ears of data centre operators like NEXTDC, resulting in ever-increasing levels of contracted utilisation.
In FY 2017 NEXTDC saw contracted utilisation increase 21% to 31.5MW, ultimately leading to a 77% increase in EBITDA to $49 million.
With the shift to the cloud still gathering pace, I expect another solid increase in contracted utilisation in FY 2018.
This may not, however, immediately result in explosive earnings growth. In FY 2018 management expects EBITDA in the range of $56 million to $61 million, which will be a year-on-year increase of between 14% and 24.5%.
While this may not immediately sound like enough growth to justify its shares trading at 52x trailing earnings, it is important to understand why earnings growth will slow.
NEXTDC is investing heavily in its future and plans to open three new facilities during the year which will bring its total network capacity to 126MW.
This is forecast to result in higher operating costs in FY 2018, with the benefits of the investments expected to be realised in FY 2019, where brokers have widely tipped EBITDA growth to accelerate.
Which isn't surprising given that in previous years capacity additions have been a leading indicator of revenue growth.
One of these new data centres is its B2 Brisbane data centre which recently became the first Australian data centre to receive Tier IV Certification of Constructed Facility. This essentially means that it is able to withstand individual equipment failures or distribution path interruptions and still maintain IT operations.
The other two additions are expected to follow suit and be awarded Tier IV Certification in due course, arguably providing the company with an edge over the competition.
Foolish takeaway
While its shares may be a little on the expensive side, I believe the favourable industry trends and its market-leading position will allow it to generate the kind of earnings growth that justifies the premium.
This, in my opinion, makes it one of the best tech shares to invest in on the Australian market today.
