NEXTDC Ltd (ASX: NXT) shares have finally given investors something to cheer about.
The data centre operator's shares have jumped 10% to around $6.35 on Wednesday after releasing an update addressing concerns about its financial position.
Even after that rally, the shares remain approximately 62% below their 52-week high of $16.78.
So, is today's news enough to make them a buy?
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Why investors have been worried
Last week, NEXTDC stunned the market by revealing that electricity supplier Jemena had delayed infrastructure upgrades needed to power its M3 Melbourne data centre.
With some contracted capacity unable to come online as planned, NEXTDC cut its FY27 underlying EBITDA guidance from $385 million to $410 million to between $245 million and $265 million.
I can understand the concern. NEXTDC is spending billions expanding its data centre network, and delays in getting customers connected mean it has to wait longer to start collecting revenue.
Investors have also been questioning whether the setbacks could affect the company's ability to meet its debt obligations.
Today's announcement goes some way towards addressing that concern.
What did NEXTDC reveal?
NEXTDC confirmed it met both financial covenants at 30 June, its latest completed testing date.
Its gearing ratio was just 8.2%, comfortably below the maximum allowed level of 60%. It also reported a pro forma interest cover ratio of 5.91 times, compared with the required minimum of 1.5 times.
In simple terms, those figures suggest the company had considerable room before breaching its lenders' financial limits at that date.
And there was an important detail. NEXTDC excluded the expected earnings from M3 customer contracts affected by the power delay when preparing its pro forma figures.
The interest cover calculation does include expected earnings from other contracted capacity, so it shouldn't be confused with profits already flowing into the bank.
Management also expects to remain compliant at the next covenant test in December.
NEXTDC reported $8.675 billion in liquidity at September's end, although only $1.275 billion was cash. The remainder was undrawn financing, with access subject to conditions and future covenant compliance.
I think that is encouraging information for investors who feared the M3 problems could quickly turn into a financing crisis.
Would I buy NEXTDC shares today's rally?
I would be happy buying NEXTDC shares at current levels, although I'd expect plenty of volatility.
The power delay hasn't disappeared. Management still expects the relevant supply upgrade during FY28, and further setbacks could delay revenue even longer.
Affected customers also have contractual rights that could lead to compensation or cancellations. But I remain optimistic about NEXTDC's longer-term opportunity.
It has secured substantial demand for data centre capacity at a time when cloud computing and artificial intelligence (AI) are increasing the need for reliable digital infrastructure.
If the company can deliver that capacity and start billing customers, earnings could look very different a few years from now.
Foolish takeaway
Today's announcement is a welcome sign that NEXTDC has financial breathing room while it works through the M3 setback.
There is still plenty for management to prove, especially around power delivery and the timing of customer revenue.
But with shares so far below their previous high, I think patient investors have an opportunity to buy into the company's long-term growth at a much lower price.
