NEXTDC (ASX:NXT): A good FY25 growth opportunity on paper, but it comes at a cost

This week’s deep dive is on NEXTDC (ASX:NXT). It is the biggest data centre stock on the ASX and the second biggest in Oceania after Equinix. It has had an unparalleled record of success in the last decade, growing its market cap from $80m to over $6bn!

But will NEXTDC’s run continue? We think there is potential, but it is by no means certain to happen and the company is no longer cheap. And we’re not just talking about the share price and multiples.

 

Who is NEXTDC?

NextDC was founded in 2010 by Bevan Slattery and has a portfolio of 17 data centres around Australia. Data centres are buildings hosting applications that store and share application and data. If you’ve used technology of any kind (whether computers or even mobile phones), you’ve likely been assisted by a data centre without even knowing it.

It listed in 2010, raising $40m at $1 per share in a deal valuing the company at $80m. But now, the share price is over $15. That is impressive enough, but doesn’t tell the full story. With all the capital raisings the company has done over the years (taking its shares on issue from 80m to over 500m), those original shares are only worth 15c today, representing over 100x growth over 12 years.

 

 

NEXTDC listed early in its life because of the extreme amount of capital needed and difficulty of sourcing it from private markets back then. Some of it was funded by Slattery’s sale of Pipe Networks for $373m in 2010, but it needed further capital.

 

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A great growth story

While Slattery departed not long after listing, it has been led by Craig Scroogie ever since. It was clear data centres were going to be needed in the future, but it was only the major telcos that had them. The company betted that businesses and their customers needed and wanted even more capacity. Despite the upfront capex, data centres can generate revenue fast once operational.

Fast forward to today and NEXTDC made $404.3m (up 12%) in FY24, alone with $204.3m EBITDA (up 5%). It has a Forward Order Book of 87MW which is more than 100% of its existing billing utilisation. In other words, there is more demand than can be met. The company made a post-tax loss of $44.1m, double the year before as it built data centre capacity, although it is hardly an emergency considering it has $1.2bn in cash, $2.7bn in total liquidity and gearing of 3.4%.

 

 

For FY25, consensus estimates call for $435m revenue and $214.9m EBITDA, which would represent modest growth. But from FY26, things are expected to take off as its international data centres come online. In FY26, analysts expect $513.3m revenue and $253.4m EBITDA. For FY27, $638.8m revenue and $325.6m EBITDA.

 

A COVID beneficiary that’s betting the benefits will continue

NEXTDC was in a good space during the pandemic due to the rise in remote working. So what? Well clearly you don’t just want all your data sitting in an office somewhere. And businesses have enough worries as it is without having to worry about infrastructure and whether or not it can operate. But the company is betting that the trend is not slowing down. Only a couple of months ago, it raised over $600m for new data centres in Auckland and Kuala Lumpur. This is the company’s first significant investment outside Australia and into the high-growth APAC region. And this deal now gives it liquidity of $2.6bn.

It has indicated plans for future data centres in Singapore and Japan. But considering the Kuala Lumpur and Auckland centres will not be open until the 1st half of FY26, it’ll be a while yet. In raising capital, the company also announced further contract wins and plans to expand capacity further.

 

There are risks, but are they worth it?

We would note a couple of things.

First, NEXTDC is not cheap. It trades >40x EV/EBITDA for the next couple of years. The first EPS positive year forecast is FY29 and the P/E for this year is a staggering 67x. Even so, the analysts covering the stock have a mean target price of $19.85, over 20% above the current share price.

Second, there are a number of risks, including data centre interruption or outages, key customer contracts not continuing and the company’s ability to manage its debt. The latter is a key concern for us.

Third, it is inevitable that more capital raisings will be required unless or until the company gets to a point where it is content with the number of data centres it has and decides to ‘sit back’ regarding its expansion plans.

 

Our view

Although this call could come back to bite us, we wouldn’t invest in it right now. We know data centre demand is only going in one direction, but we are not so sure NEXTDC is the best way to pounce on this demand. Maybe Equinix is, but that’s a topic for another article.

The bottom line is that NEXTDC is undoubtedly in a good industry and has terrific prospects, but it is not profitable and will inevitably need future cash injections down the track to keep growing to scale and to capitalise on the opportunity it has. This being said, it is certainly a good trading opportunity as we enter a new financial year and is better positioned to capitalise on the demand for data centres than any of the penny stocks that only have one or two facilities (or perhaps even none).

 

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