Why Amazon’s results point to a big upside for this fledgling ASX stock

Those worried that the 66% surge in the share price of Nextdc Ltd (ASX: NXT) and its price-earnings (P/E) multiple of over 100 times puts the stock in the stratosphere of the value scale may want to take a look at the latest profit results from US tech giants.

These tech leaders in the data centre space, such as Amazon Web Services (AWS), Alphabet Inc (Google) and Microsoft Corporation, continued to report huge increases in earnings.

This means two key things: the cloud computing market which relies on data centres is far from maturing; and even with the tech titans dominating the industry, the market has not hit a saturation point.

That’s why investors shouldn’t be too concerned about the seemingly high valuation on NextDC given the bright growth outlook for the $2.3 billion market cap stock, which is a fraction of the value of its US competitors.

Citigroup noted that AWS posted growth of 49% in the latest quarter compared to 45% in the December quarter and 42% in the quarter before that. Google and Microsoft both delivered growth rates that are twice that of AWS although they are coming off a much smaller base.

“NXT is the only way you can play this in the Aussie market if you want leverage to the cloud demand thematic,” said the broker.

“Citi forecasts global cloud revenues to double over the next three years and Australia’s public cloud services market is expected to grow 36% to $5.4bn over 2017-2019.”

This is why you shouldn’t be put off by NextDC’s 110 times P/E (based on consensus FY19 estimates). If you looked at ASX-listed online heroes REA Group Limited (ASX: REA), Carsales.Com Ltd (ASX: CAR) and SEEK Limited (ASX: SEK), you’d probably find they traded on outrageous multiples in their early years as well.

Most analysts are also not factoring in high utilisation rates at some of NextDC’s data centres. Given the robust demand outlook for cloud computing, this means there is potential upside to brokers’ price targets on the stock which currently stands at $7.23 a share.

On the downside, NextDC is embroiled with a dispute with its landlord Asia Pacific Data Centre Group (ASX: AJD), which is proving to be an unwelcome distraction for the company although I do not think this poses a significant risk to NextDC.

But NextDC isn’t the only emerging tech stock with the potential to become ASX 200 (Index:^AXJO) (ASX:XJO) heavyweights. The experts at the Motley Fool have uncovered three future “disruptors” that could follow the footsteps of REA Group.

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Motley Fool contributor Brendon Lau owns shares of NEXTDC Limited. The Motley Fool Australia has recommended Limited, REA Group Limited, and SEEK Limited. 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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