I bought Nextdc Ltd (ASX: NXT) shares more than a year ago, with the intention of holding them long term.
The thesis was pretty simple – I wanted some exposure to the AI trade and the company's growth plans seemed ambitious yet achievable.
Unfortunately (for me), the shares have pretty much been on a slide since I bought them, at a price just north of $18.
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Major downgrade sent Nextdc shares sliding
The pain became acute over the past week or so when the company on 21 October announced a major earnings downgrade as a result of its inability to get additional power supplied to its M3 data centre in Melbourne.
This followed community protests against the additional electricity grid installations.
Nextdc said the construction delays meant the next increase in power supply was now expected in FY28, which would push back the delivery and billing of contracted capacity.
This led to a major revenue downgrade, with the company now expecting revenue of $475-$500 million for this financial year down from $615-$640 million.
Underlying EBITDA was expected to be $245-$265 million, down from $385-$410 million.
Not surprisingly the shares fell sharply on the news, plunging about 40%.
Nextdc released a follow-up news release on 28 October, reassuring shareholders that it was in compliance with its debt covenants.
Nextdc shares have recovered from the low of $5.07 they hit when the bad news broke, but are still down 60.5% on a 12-month basis, at $6.18.
Brokers divided on the future for Nextdc shares
As a shareholder, I was therefore heartened to see a UBS report predicting that the share price will recover to about the price I paid.
The broker said the release about the company's banking covenants "provided much-needed detail.
They said their analysis indicated that the company has the funds and the ability to draw down debt not only to meet its capital expenditure needs for the current M3 contracts, but also for the power works and to fund a decent portion of any future contract wins.
They added:
While we don't think it is required, NXT also have a landbank they could sell, hybrid notes interest that could be deferred, or assets to recycle. We view the current scenario as a small wobble in the longer-term structural story of cloud/AI.
UBS, which released its new research note on 29 October, has maintained its buy rating on Nextdc shares along with an $18.50 price target.
The broker said it valued the company's landbank alone at $5.10 per share.
I found this particularly comforting, as it suggests the shares are significantly oversold.
RBC Capital Markets has a price target on Nextdc of $22.
Morgan Stanley has a contrary view with a price target of just $6.70.
The bullish outlook from two brokers is good news for me, and as a long-term holder, I'm not overly fussed by the current troubles.
However, the company's execution from here on in will be a big test.
Nextdc is valued at $4.78 billion.
