The NextDC Ltd (ASX: NXT) share price has been range bound between $6 and $7 for more than a year. At the same time, the S&P/ASX 200 (INDEXASX: XJO) and ALL ORDINARIES (INDEXASX: XAO) have outperformed NextDC many times over in the same period.
Things have started to change for the better in 2020, with the NextDC share price up more than 10% in January and more importantly, finally pushing above $7. After such a prolonged period of consolidation, could this be an opportunity to buy NextDC shares?
The data revolution
Data centre infrastructure and cloud connectivity is on a path to revolutionise the way businesses manage their data . The sheer anticipated growth and transition to cloud-based models has allowed data centre providers such as NextDC and Megaport Ltd (ASX: MP1) to attract and maintain premium valuations.
Gartner predicts that 73% of workloads will be in public cloud while 27% of workloads will be in private cloud by 2021. By 2025, 80% of enterprises will shift workloads to cloud-based models. The global hybrid cloud market is expected to reach a value of $138.63 billion by 2023. While NextDC does attract an eye-watering valuation, the company has some top-tier facilities and assets, a strong cash position ($399 million as at 30 June 2019) and a solid outlook moving into 2020.
FY19 results and FY20 outlook
The company reported a reasonable FY19 report with revenues increasing 15%, underlying earnings before interest, tax, depreciation and amortisation (EBITDA) up 13% and a net loss of $9.8 million. It successfully raised $500 million of senior unsecured debit and refinanced its $300 million syndicated senior secured debt facility, which provides the company with more than $700 million in liquidity to take advantage of customer-driven expansion opportunities.
Moving forward, NextDC anticipates FY20 revenue to be $200–206 million, up 12–15% on FY19. This will be driven by solid growth in recurring data centre services and strong demand for connectivity solutions. Its underlying EBITDA also looks to expand by 17–23% as the company achieves greater scale and efficiencies.
It is challenging to look at the NextDC price chart and attempt to buy it at today’s prices. However, the fact that its share price has moved higher after such a prolonged period of consolidation is very positive. I believe the NextDC share price could head higher in the medium term, but the company ultimately needs to deliver on its forecasts and continue to expand its capabilities to leverage this growing market.
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Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of MEGAPORT FPO. The Motley Fool Australia has recommended MEGAPORT FPO. 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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