It has been a brutal month for NEXTDC Ltd (ASX: NXT) shareholders.
The data centre operator's shares have lost a substantial amount of their value following an unexpected announcement that has raised questions about its growth plans.
But with the shares now trading well below their previous levels, could this be an opportunity for long-term investors?
Broker Morgans certainly thinks so. Here's why I agree.
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What's happened to NEXTDC?
The sell-off followed news that NEXTDC's electricity distributor, Jemena, had suspended work on infrastructure needed to provide additional power to its M3 Melbourne data centre.
The suspension was partly caused by opposition from local residents and stakeholders.
Without the additional electricity, NEXTDC cannot deliver all the contracted capacity it had expected, pushing back revenue and earnings.
As a result, management reduced its FY27 underlying EBITDA guidance from $385 million to $410 million to a range of $245 million to $265 million.
That's a downgrade of approximately 36% at the midpoint. I can understand why investors were alarmed.
NEXTDC is investing billions of dollars into expanding its data centre network. Delays in connecting these facilities to the electricity grid can have a substantial financial impact.
And the concern is that similar problems could emerge at other developments.
Why Morgans thinks the shares are cheap
Despite the disappointing announcement, Morgans believes the market has overreacted, and its shares are "incredibly cheap."
The broker notes that NEXTDC shares have been trading at a discount of around 30% to the company's estimated net tangible asset (NTA) value of approximately $7.50 per share.
In simple terms, that means investors are valuing NEXTDC shares at considerably less than the accounting value of its tangible assets after liabilities.
I think that's an interesting position for a company operating in an industry with such substantial long-term growth opportunities.
Morgans argues that the discount looks excessive if the power problems are temporary. And there are reasons to believe they could be.
NEXTDC management expects the additional power at M3 to arrive during FY28, which would allow the company to progress towards delivering the affected contracted capacity.
The company also confirmed that it remains compliant with its debt covenants, addressing another concern surrounding its financial position.
Following the sell-off, Morgans upgraded NEXTDC shares from hold to buy and established a $7.50 price target. That's broadly in line with its estimated NTA and implies over 30% upside from recent trading levels.
Would I buy NEXTDC shares?
I think this could be an excellent opportunity for patient investors.
The demand for data centre capacity continues to be supported by cloud computing, artificial intelligence, and the growing amount of information businesses need to process and store.
NEXTDC has already secured customer contracts that could support future revenue as capacity becomes available.
And importantly, the M3 setback appears primarily related to the timing of power delivery rather than a disappearance of customer demand.
Of course, I wouldn't ignore the risks. The delays could extend beyond current expectations, and affected contracts contain provisions that could allow customers to claim compensation or terminate under certain circumstances.
The substantial capital required to expand its network also means financing and execution remain important considerations.
And an NTA discount doesn't automatically mean a share is undervalued. But I think Morgans makes a compelling argument that the market has become overly pessimistic about NEXTDC's future.
Foolish takeaway
For me, the latest developments have made NEXTDC a riskier investment, but also a potentially more rewarding one.
I expect it could take time for management to restore investor confidence and demonstrate that the M3 problems are being resolved.
Nevertheless, I believe the longer-term opportunity remains substantial. At these levels, I would be happy buying NEXTDC shares and giving the business time to work through its current challenges.
