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Nextdc Ltd shares tumble lower on broker downgrade

The market may be racing higher on Monday, but the same cannot be said for the Nextdc Ltd (ASX: NXT) share price.

At the time of writing the data centre operator’s shares are down almost 5% to $5.68, compared to the 0.5% gain being made by the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

What happened?

With no news out of the company this morning, today’s decline is likely to be attributable to a research note out of Deutsche Bank.

According to the note, the investment bank has downgraded NEXTDC’s shares from a buy rating to a hold. It has, however, increased the price target on its shares from $4.90 to $5.50.

Analysts at Deutsche Bank have made the move after its shares significantly outperformed over the last 12 months. During this time its shares have climbed over 69% and now trade on sky high multiples.

As a result, the broker thinks there is a chance that its shares could underperform over the next 12 months.

Furthermore, Deutsche believes that the current valuation leaves little by way of a margin of safety and appears concerned that capital expenditures are hard to forecast for data centres. Especially given the risks of technological changes that the industry faces.

Should you buy the dip?

While I do think that Deutsche Bank makes some valid points, I remain confident that NEXTDC is a great long-term investment.

When the dust settles investors might want to consider snapping up NEXTDC shares at this lower price. After all, there are few companies on the local market which stand to benefit as greatly from the seismic shift to cloud computing.

Its shares may look expensive on paper today, but I believe the growth in earnings it will deliver over the next few years will more than justify this premium.

This makes it one of my favourite shares in the tech sector alongside Altium Limited (ASX: ALU) and Appen Ltd (ASX: APX).

As well as NEXTDC, Appen, and Altium, I think these growth shares would be great long-term investments.

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Motley Fool contributor James Mickleboro owns shares of NEXTDC Limited. The Motley Fool Australia owns shares of Altium and Appen Ltd. 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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