Like many tech shares, the NEXTDC Ltd (ASX: NXT) share price has had a very tough start to the year.
Since the start of 2022, the data centre operator's shares have fallen 12%.
This means the NEXTDC share price is now in negative territory on a 12-month basis.
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What's happening with the NEXTDC share price?
Investors have been selling down the NEXTDC share price along with other ASX tech shares this year following a selloff on the Nasdaq index.
That selloff has been driven by the release of minutes from the US Federal Reserve, which indicated that the increasingly hawkish central bank may remove its support for financial markets sooner than anticipated. This includes increasing interest rates quicker than previously expected.
Rising interest rates are bad news for shares that trade on high multiples. That's because they form part of the financial models that valuations are based on.
When interest rates are low, valuations are higher. The opposite happens when interest rates rise, which is the scenario we are facing right now.
According to a recent note out of Citi, it is expecting NEXTDC to deliver earnings per share of 3 cents in FY 2022, 8 cents in FY 2023, and then 16 cents in FY 2024. This means the NEXTDC share price is trading at approximately 71x FY 2024 earnings today, which is significantly higher than the market average.
In light of this, it isn't hard to see why it got caught up in the selloff. Though, it is worth highlighting that NEXTDC is investing heavily in its future growth, so these earnings estimates are not truly indicative of its actual earnings power.
Is this a buying opportunity?
While buying into the tech sector right now carries a lot more risk because of the hawkish Fed, Citi appears to believe that patient investors will be rewarded.
The broker has a buy rating and $15.40 price target on its shares. Based on the current NEXTDC share price of $11.36, this implies potential upside of almost 36% for investors.
Citi continues to "expect strong earnings growth underpinned by accelerating cloud adoption and digitisation."
