The Motley Fool

Is it too late to buy NEXTDC Ltd (ASX:NXT) shares?

It has been another positive day of trade for the NEXTDC Ltd (ASX: NXT) share price.

In afternoon trade the data centre operator’s shares are up over 2% to $7.86. This means NEXTDC’s shares have climbed a staggering 71% since this time last year.

Is it too late to buy NEXTDC shares?

While I don’t think it is necessarily too late to buy NEXTDC shares, I wouldn’t buy its shares on the expectation that it will repeat its share price heroics over the next 12 months.

After all, this latest gain means it shares are changing hands on a nosebleed multiple of approximately 200x estimated full-year earnings.

Though it is worth noting that this is somewhat misleading as the company is investing heavily in its data centre capacity to meet future demand. Removing these investments from the equation would certainly result in a lower price-to-earnings multiple.

Furthermore, once its infrastructure is in place, it will in many respects become the Transurban Group (ASX: TCL) of data and a cash flow generating monster. Something that I find highly attractive in an investment.

What are the risks?

The first is of course the earnings multiple. When shares trade on such sky high multiples they can come under significant selling pressure if a company’s growth is less than the market expected.

The good news here is that many of the world’s largest tech companies have recently reported stellar growth from their cloud businesses, which I think bodes well for NEXTDC.

Furthermore, broker notes out of UBS in May and Morgan Stanley in April revealed that they rated NEXTDC as buys and had $9.05 and $9.20 price targets on its shares. Clearly some experts believe it isn’t overvalued yet.

And one of the biggest risks is that data centre storage could become commoditised in the future and reduce the profitability of NEXTDC. While there are no signs of this happening and recent deals within the industry indicate that those involved don’t expect this to happen any time soon, it is something to bear in mind.

Are there alternatives?

A cheaper alternative that could be worth a closer look is Macquarie Telecom Group Ltd (ASX: MAQ). Its cloud services business has been growing at an impressive rate and looks set to be a key driver of growth in the future.

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Motley Fool contributor James Mickleboro owns shares of NEXTDC Limited. The Motley Fool Australia owns shares of and has recommended Transurban Group. 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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