The Nextdc Ltd (ASX: NXT) share price seemed to be the gift that keeps on giving. Its share price only slumped 23% from peak to trough during the initial March sell-off to a low of $6.59 before running to a record all-time high of $14 in early November.
However, its success came to a halt in the latter half of November. The NextDC share price is down 15% this month. This compares to the 10% gain for the S&P/ASX 200 Index (ASX: XJO) and 0.62% increase for the S&P/ASX All Technology Index (ASX: XTX) sector.
Growth to value rotation
ASX data centre companies trade at eye watering valuations despite low double digit revenue growth. NextDC boasts a market capitalisation of $5 billion but in FY20 delivered $205.2 million, $104.6 million earnings before interest, tax, depreciation and amortisation (EBITDA) and a net loss after tax of $45.2 million. Trading at 24 times FY20 revenue places the company in a similar valuation bracket as Zip Co Ltd (ASX: Z1P).
The recent rotation from growth and tech stocks to value and cyclical stocks such as banks, travel and resources is likely to blame for weakness in the NextDC share price. But even then, the company is underperforming the broader information technology sector.
Buy now, pay later style valuations
Data centres have been able to maintain premium valuations due to the increasing relevancy of cloud and anticipated long term growth for the sector. In the NextDC annual general meeting held on 13 November, the company noted that global investment in public cloud services and infrastructure will more than double from 2019 to 2023. The COVID-19 pandemic has pushed the digital transformation initiatives for many organisations to adapt to the new ways of doing business.
Despite the excitement and sustained growth expected for the cloud sector, NextDC's growth can appear lacklustre at face value. In FY20 its revenue from data centres increased 18% to $200.8 million and underlying EBITDA increased 23% to $19.5 million. This compares to many ASX 200 tech shares such as Altium Limited (ASX: ALU) and WiseTech Global Ltd (ASX: WTC) that deliver revenue growth in the range of 20-40%.
Megaport Ltd (ASX: MP1) slumped on quarterly results
Despite earnings growth that may appear to be lacklustre at face value, the NextDC share price has been able to hold up well during earnings updates.
Its rival Megaport, on the other hand, experienced a sharp sell off after its quarterly update. On 21 October, the company highlighted that revenue for the quarter had only increased 2% quarter-on-quarter to $17.3 million. Its shares fell as much as 15% on the day.
