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Morgan Stanley says buy Nextdc Ltd (ASX:NXT) as its shares will outperform

Tech stocks might be on the nose following the disappointments of US leaders like Facebook, Inc. but the share price of Nextdc Ltd (ASX: NXT) could break out of its funk in the coming weeks to retest its record high, if Morgan Stanley’s prediction comes to pass.

Shares in NextDC are trading flat in lunch time trade after retreating close to 10% from its June 21 high of $8.10 from profit taking. In spite of the retreat, the stock is still up 78% while the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up 10%.

The data-centre provider is a victim of its own success with buyers sitting on the sidelines as high-flying tech stocks lost some of their star appeal, although Morgan Stanley thinks that is about to change as we head into the August profit reporting season.

The broker is tipping the stock to rise in absolute terms over the next 45 days from a lack of negative surprises. Stocks like NextDC are trading at a price-earnings (P/E) premium to the market and are susceptible to a sharp sell-off if they can’t meet lofty expectations.

You only need to look at the recent share price reaction of online retailer Kogan.com Ltd (ASX: KGN) and milk company A2 Milk Company Ltd (ASX: A2M) to see how heavy the weight of expectations can be.

“Positive read-throughs on data centre demand from global comps and customers increases [sic] confidence into results,” said Morgan Stanely.

“This comes on top of a guidance reiteration post capital raise and a notes issue. We expect few adverse surprises.”

The broker noted that NASDAQ-listed DIGITAL RLTY TR/SH lifted its full-year guidance during the latest quarterly reporting season and commented that data centre demand has picked up “appreciably” in 2018.

While NYSE-listed QTS Realty Trust Inc isn’t as directly comparable to NextDC, Morgan Stanley is encouraged that it exceeded expectations on bookings growth as management commented that the skew was towards smaller co-location clients instead of hyperscale public cloud deals.

“Investors in Australia are concerns [sic] about lower $/MW [megawatt] for NXT if public cloud customers grow faster – look like it’s not all 1-way traffic on that front,” explained the broker.

It’s also noteworthy that Amazon Web Services (the largest cloud computing company in the world and a subsidiary of Amazon.com) beat consensus with its 49% sales growth.

One reason why I think NextDC is a buy is because of its relative size to its global peers. This leads me to believe that there is further room for the stock to climb given its market cap of around $2.5 billion.

Morgan Stanley has an “overweight” recommendation on the stock with a price target of $9.20 a share.

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Motley Fool contributor Brendon Lau owns shares of NEXTDC Limited. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended Kogan.com 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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