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Citigroup says buy this hot ASX tech stock after its price crash

Percentages and Technology

High-growth tech stocks that disappoint on their outlook have been brutally punished during the August reporting season. Surely some of them must have fallen into the bargain zone after a big sell-off?

It’s not hard to think of some ASX stocks that have found themselves on the wrong side of expectations. The Appen Ltd (ASX: APX) share price, Nearmap Ltd (ASX: NEA) share price, Vista Group International Ltd (ASX: VGL) share price and Hansen Technologies Limited (ASX: HSN) are a few examples.

While I generally refrain from buying into underperforming stocks issuing disappointing news, Citigroup thinks investors should make the exception for the Nextdc Ltd (ASX: NXT) share price.

Value buy for the patient investor

Shares in the data centre operator have fallen around 10% since it reported its full year results last week. It wasn’t so much its FY19 performance that spooked investors, but it’s questions around the market’s bullish expectations for the group that’s sent some shareholders scrambling for the exits.

However, Citigroup thinks the sell-off is overdone and has reiterated its “buy” recommendation on the stock as it sees around a 40% upside to the stock.

“We see FY20e as the year of ‘digestion’ as the financials absorb the annualisation of higher depreciation charges while FY21e should see NXT witness the operating leverage inherent in the business model as S2 billing utilisation achieves critical mass,” said the broker.

“While the outlook is the most encouraging and constructive that it has ever been, large scale deployments by clients take time so patience is required and we expect FY20e patience to be rewarded in FY21e.”

Price discipline an added advantage

Citi also liked that management is showing price discipline as it ramps up capacity. The group’s premium position helped it increase revenue per megawatt by 5% half-on-half and 14% year-on-year. NextDC is not sacrificing price for volume and that bodes well for its bottom line.

The company is building more datacentres and adding capacity to meet anticipated growth in demand for such services. Demand continues to look strong even as NextDC added 12MWs of capacity.

“While NXT’s FY21e EV/EBITDA [enterprise value-to-earnings before interest, tax, depreciation and amortisation] of 14.2x represents a -13% discount to its global data centre peers, it is growing EBITDA >2x as fast as its peers (28% 3-year EBITDA CAGR vs. 14%),” added the broker.

Citi increased its price target on NextDC to $8.45 from $8.09 per share.

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Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Hansen Technologies. The Motley Fool Australia owns shares of and has recommended Nearmap Ltd. The Motley Fool Australia owns shares of Appen Ltd and Vista Group Int'l. The Motley Fool Australia has recommended Hansen Technologies. 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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