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Why I think you should consider buying Nextdc Ltd

A few slips in share price lately have had many wondering if data centre operator Nextdc Ltd (ASX: NXT) is in buy territory and I think a potential buy-in is certainly getting close.

Shares in NEXTDC opened at $6.34 today, up slightly, but still on the trend down from its March 16 high of $6.96.

NEXTDC operates independent data centres across Australia with a focus on scalable, on-demand services to support outsourced data centre infrastructure and cloud connectivity for businesses of all sizes.

It’s a burgeoning sector for certain, with the rise of cloud-computing meaning NEXTDC’s services are in hot demand and with the company proving itself as reliable to both customers and shareholders so far, long-term earnings growth is likely on the cards.

In terms of financial fundamentals NEXTDC’s first-half results were solid, with strong operating leverage evident in its 41% rise in EBITDA to $33.6 million and NPAT at $8.4 million.

The report showed NEXTDC is steadily increasing its customer base, with half-year results logging 176 new customers, up 25% from the previous corresponding period.

NEXTDC reported revenue growth of 32%, proving to be well-capitalised for growth with $218 million cash underpinned by predictable, long-term customer contracts and bumped up FY17 revenue in the range of $152 million to $158 million – buoyed by record project fees already netted in the first-half.

NEXTDC seems a better option for a buy-in right now than its peer Macquarie Telecom Group Ltd. (ASX: MAQ) for example.

Macquarie Telecom is engaged in the provision of hosting services to corporate and government customers across Australia, also operating in the telco mobile space.

Macquarie announced a jump in revenue and NPAT when it reported its half-year results in February with a fully-franked interim dividend of 25c per share maintained from the previous corresponding period.

Macquarie’s NPAT rose from $6.2 million for the half-year to December 31 2016 to $8 million for the half-year to December 31 2017, with EBITDA up $3.5 million over the same period to $22.5 million.

But Macquarie seems pretty narrowly focused on gaining market share from Optus and TPG Telecom Ltd (ASX: TPM) at the moment, which leaves NEXTDC alone to continue to build upon its first-mover advantage in the internet cloud space.

Investors looking outside the cloud and telecommunications arena, but seeking out IT growth stocks, can’t go past some of the high-profile software companies asserting themselves as serious players, with Bravura Solutions Ltd (ASX: BVS) coming to mind as a definite stand out.

Bravura’s share price is trading at a premium right now, at $2.70 at the time of writing, after hitting a 52-week high in March at $2.79.

With a market cap of $580 million Bravura is still in smaller fry territory, but the company is steadily gaining market share in the competitive software sector, with recognition for its superannuation platform products in particular.

Still in software, but on the bigger end, is Technology One Limited (ASX: TNE) – a software provider offering custom-development options with good global reach and 14 offices across Australia, New Zealand, Asia, the South Pacific and the UK.

Technology One shares have had a volatile 12 months, at $5.05 the time of writing, but the company was named as among the top 10 stock picks out of Bell Potter for 2018, with the broker placing a buy recommendation on the stock in January and a 12-month share price target of $6.20.

Growth investors should never ignore the thriving IT sector when considering stocks to pick up for their portfolio and those who have done some research into NEXTDC lately can likely see how its fundamentals prove its strong position for growth easily justifies its current share price.

One to watch for any decent share price dips that could offer an in.

Foolish Takeaway

While NEXTDC shares are not exactly cheap, its high growth potential is hard to ignore, and its robust cash flows and highly optimistic future will likely feed into share price rises for some time yet.

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Motley Fool contributor Carin Pickworth has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended TPG Telecom Limited. The Motley Fool Australia owns shares of Bravura Solutions 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 Scott Phillips.

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