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Can the NextDC share price continue to defy gravity?

The NextDC Ltd (ASX: NXT) share price has defied the raging bears and hit an all-time record high on Friday of $10.40 before closing at $9.20. As at Friday’s closing price, NextDC shares have returned 36% in 2020, far outperforming the S&P/ASX 200 Index (ASX: XJO) and All Ordinaries (ASX: XAO) which are both down by around 25%, year to date.

So, how does this seemingly overpriced tech play continue to climb higher amidst its recent capital raising and dire economic circumstances, and could there be an opportunity to enter? 

Capital raising 

NextDC has undertaken a significant $672 million capital raising (approximately 20% of its current market capitalisation) to support its growth agenda, including a proposed new data centre in Sydney.

The capital will provide the company with greater balance sheet flexibility to accelerate and expand a range of growth initiatives. The capital raising was very successful with a comprehensive take-up of the offer.

The placement shares were issued at $7.80 per share, which represented a 15% discount to its closing price before the trading halt. The fact that this capital raising was well-received in this kind of climate highlights the strength of the NextDC business model and the cloud/data centre space. 

Moving forward 

The quality of earnings for cloud, connectivity and data services continues to be exemplified in this coronavirus stricken period. As the workforce shifts to working remotely and from home, cloud providers are seeing a surge in demand and utilisation.

Tech giant Microsoft, for example, provided an update on how its various cloud services were holding up during the pandemic. The company said that it had seen a 12 million jump in daily users in a week to more than 44 million for its Microsoft Teams app, its Windows Virtual Desktop usage grew more than 300% while government use of public Power BI to share COVID-19 dashboards with citizens jumped 42% in a week. 

This reiterates the narrative of opportunities at hand for NextDC and the continued quality earnings that investors can expect. Even prior to the coronavirus outbreak, NextDC announced a significant material new contract win. This resulted in an increase in its commitments at its Victorian data centre facility from 15MW to approximately 21MW. 

Foolish takeaway 

Given NextDC’s capital raising and the 15% discount offered to institutional investors, the NextDC share price may face some short-term headwinds as investors may be induced in a profit-taking mindset during such uncertain and volatile times.

However, this does not change the long-term story that the company is placed front and centre in an exciting space that will continue to experience accelerated earnings for years to come. 

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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. 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.