A growing ASX 200 tech share to buy now: fund manager

Australia is behind many developed nations in the pace of cloud adoption.

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S&P/ASX 200 Index (ASX: XJO) tech shares have broadly struggled this year.

While the ASX 200 is down 1.7% since the opening bell on 4 January, the S&P/ASX All Technology Index (ASX: XTX) – which also contains companies outside the ASX 200 – has lost 17.4%.

Of course, some ASX 200 tech shares have done better while others have fared worse.

Strong half year results helped bolster this ASX 200 tech share

Australian data centre operator Nextdc Ltd (ASX: NXT) falls on the better end of the spectrum, with shares down 7.7% year-to-date.

Nextdc has facilities in Melbourne, Sydney, Brisbane, Perth, and Canberra, with expansion plans ahead over the next two years. It also operates a partner ecosystem with some 730 partners, including leading global cloud platforms.

The ASX 200 tech share has slumped this year despite reporting record half year results on 24 February.

Highlights included a 158% increase in net profit after tax (NPAT) from the prior corresponding half year, with NPAT hitting $10.3 million. The company’s balance sheet was also strong, reporting liquidity of $2.1 billion, which includes $1.4 billion of undrawn debt facilities.

Why Nextdc is a ‘buy’

In a note published in the Advertiser over the weekend, Catapult Wealth’s Timothy Haselum said, “Australia is behind in cloud adoption so there is still a strong growth story of demand here, despite competition ramping up.”

Investors looking into ASX 200 tech shares may be put off by the company’s high price to earnings (P/E) ratio, currently at 769 times.

However, Haselum noted, “This is a very capital intensive industry with high barriers to entry so don’t let the high P/E ratio turn you off, that’s just what data centres trade on.”

Haselum continued:

NXT plays in the more expensive end of town where pricing is more stable, with premium clients like Amazon.com (NASDAQ: AMZN) and Google [Alphabet (NASDAQ: GOOGL)]. We like NXT here as despite strong reporting it’s come off its highs so we are happy to buy on this weakness.

Catapult Wealth has a 12-month price target on Nextdc shares of $14.14.

That represents about 19% potential upside for the ASX 200 tech share, currently trading at $11.90.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Alphabet (A shares) and Amazon. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Alphabet (C shares). The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), and Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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