Is this ASX 200 tech share overvalued right now? Or, is it a good long-term buy?
Fast growing cloud ecosystem
NextDC is Australia’s largest, locally-based data centre provider by quite a margin.
The ASX 200 company’s portfolio of data centres is home to one of Australia’s largest cloud centre partner ecosystems. This is highly advantageous because, in the data centre service market, ‘scale’ really matters. NextDC’s cloud centre community comprises more than 590 carriers, cloud providers and IT service providers.
Furthermore, the company is continuing to rapidly expand its portfolio of data centres, with a number currently under construction. NextDC recently completed a $672 million equity raising which will further assist with its expansion strategy.
The company is also looking at further data centre site acquisitions to expand its nationwide presence.
Continued strong growth during the pandemic
NextDC has benefitted from increased demand for cloud services during the coronavirus pandemic.
Under the government enforced lockdown measures, vast numbers of businesses have switched to a working-from-home model for their employees. Because of this, many consumers have increased their usage of bandwidth-hungry applications such as streaming video. This has been good news for the ASX 200 tech share.
Well positioned for long-term growth
NextDC has continued to grow strongly with the ongoing rise of cloud computing. Over the last 4 years, the company’s customer base has grown at a compound annual growth rate (CAGR) of 21%.
This is very strong result for a data centre provider which typically grows at much slower rates than other IT companies such as Software-as-a-Service (SaaS) providers.
Interconnections have grown even more quickly for NextDC with a CAGR of 31% over the same period.
Customers are continuing to expand their ecosystems which is driving higher use of cloud services and connectivity with other data centres.
NextDC is also continuing to build newer and more energy-efficient Tier IV data centres. This is driving higher margins and higher recurring revenues for the business.
Is NextDC a solid, ASX 200 long-term buy?
The data centre game is highly capital intensive. There are high upfront costs to build new data centres. However, once in place, operators are well positioned to reap the benefits further down the track.
I believe that NextDC is well placed for strong revenue and profitability growth over the next 5 to 10 years. This will be driven by increased economies of scale and the rollout of more efficient tier IV data centres.
Despite the company’s recent share price rise, in my view, this still makes it a tech share worth buying and holding for the long term.
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Motley Fool contributor Phil Harpur 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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