Leading broker tips NEXTDC Ltd (ASX:NXT) share price to hit $8.00

In morning trade the NEXTDC Ltd (ASX: NXT) share price has been amongst the best performers on the market.

At the time of writing the data centre operator’s shares are up 3.5% to $6.19.

Why are NEXTDC’s shares on the rise today?

With no news out of the data centre operator, today’s gain is likely to be attributable to a broker note out of Goldman Sachs this morning.

According to the note, the broker has initiated coverage on NEXTDC with a buy rating and $8.00 price target.

Goldman believes that recent investments in its data centre network has put the company in a strong position to take advantage of the industry-wide tailwinds of cloud migration and the Internet of Things.

The broker expects it to lead to high margin sales that translate into strong growth over the coming years. As a result, Goldman has forecast a three-year EBITDA compound annual growth rate of 43%. It is worth noting that this forecast is based on a conservative pricing outlook.

In addition to this, Goldman believes that demand growth can be sustained. In fact, the broker believes it could even accelerate over the next five to ten years given the tailwinds from Enterprise/Government IT outsourcing and the exponential growth in Big Data.

And while it does see risks such as increased competition, loss of key customers, and operational/security failures that damage its reputation, the broker clearly believes the potential rewards more than offset this.

Should you invest?

I agree with Goldman completely on NEXTDC. While its shares are certainly expensive today, I believe its strong long-term growth potential means it is worthy of trading at such a premium.

But it is of course worth remembering that due to its premium valuation, there is likely to be significant downside risk if things don’t turn out as planned.

But overall, I think it would be a good long-term investment along with fellow data centre operator Macquarie Telecom Group Ltd (ASX: MAQ) and potentially even elasticity connectivity and network services interconnection provider Megaport Ltd (ASX: MP1).

Motley Fool contributor James Mickleboro owns shares of NEXTDC Limited. The Motley Fool Australia has no position in any of the stocks mentioned. 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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