Should you buy, hold or sell NextDC shares?

NextDC (ASX: NXT) was founded and listed on the ASX in 2010 and is an Australian builder, owner and operator of data centres.

Over the past decade, it has grown to be Australia's leading independent data-centre operator, with a portfolio of nine operational assets in Melbourne, Sydney, Brisbane, Adelaide, Canberra and Perth, and a further two under development in Port Hedland and Darwin.

The company also recently secured sites in Auckland and Kuala Lumpur to expand regionally.

Data centres are the critical infrastructure and backbone that provides digital connectivity in modern society, enabling software to be stored and shared both through applications and data.

Without realising it, in using a smartphone, computer or tablet, you are likely using a data centre provider like NextDC either directly or indirectly every day. They have become an essential part of the social infrastructure we rely on in today's digital world.

What does NextDC do?

Historically, data centers were largely owned and operated in-house by companies with the aid of IT consultants.

With the advent and increased use of cloud computing, and shift to online gaming, streaming and demand for faster speeds, data storage has been migrating from company-owned facilities to third-party data centres and hyperscale cloud providers like Microsoft, Amazon and Google.

Independent data centre operators like NextDC have evolved to provide carrier-neutral services to enterprises and government, as well as the hyperscale cloud service providers.

One of the main advantages of independent data centres like NextDC is they enable different customers and users to collocate in the same complex, providing economies of scale and benefits in terms of latency, power savings and ultimately cost savings.

NextDC provides its customers with highly secure, reliable, temperature-controlled data centre spaces. As large users of power and water (for cooling), it also has a strong focus on sustainability and the associated carbon footprint.

NextDC is certified carbon neutral under the Australian Government's Climate Active Carbon Neutral Standard and has been independently certified as a Tier IV operator by the Uptime Institute.

For some applications, legislation also requires Australian ownership of data centre assets. NextDC is a Certified Strategic Hosting Provider under the Australian Government's Digital Transformation Agency, providing it certification to be a sovereign data centre provider to federal and state governments.

Strategy and outlook

Australia is in the top 10 fastest growing digital infrastructure markets globally with the addressable data centre market estimated to be around $7.8 billion and expected to grow at mid to high single-digit growth to 2030, according to Morder Intelligence.

Demand for data centres will likely remain strong, driven by the increasingly interconnected digital world and demand for data storage, processing speed and cloud and multi-cloud adoption, as businesses look to leverage greater digital productivity, cost savings and flexibility.

Post-COVID, and with the growth in generative AI, the structural dynamics benefiting data centre operators have only accelerated.

There is also growing evidence hyperscalers, like Microsoft, are making some extraordinarily large investments in Australia and the Asia Pacific region, both in their own capacity but also increasingly through leased data centres in an environment where access to power and local council development approvals is becoming harder. This is resulting in a premium on approved, power-secured data centres in good locations.

NextDC's recent announcement that contracted utilisation for its Australian data centres has increased 43% since December 2022 is clear evidence that it is very well positioned to capture ongoing growth in the Australian market.

NextDC's expansion plans into Malaysia and New Zealand also highlight the growing opportunity outside Australia. Much of this growth will be longer-dated but is being customer-led, as hyperscalers look to partner with high-quality and experienced providers in the region.

NXT is classified as a technology stock on the ASX, but we view it more as a social infrastructure and real estate investment.

If you break down the cost of building a data centre, about 10% of total cost is land; 20% the structure itself; and 60-70% the cost of the fit-out, hardware and systems that make it a data centre, including cooling, power, racks and security.

As a result, data centres are often perceived as expensive and capital intensive compared to many other similar sized real estate investments.

NextDC's business model consists of long-term contracts (usually three to 10 years) which results in high levels of recurring revenue, and therefore good visibility into both revenue and EBITDA.

There is considerable operating leverage in the model, with EBITDA margins in any given asset approaching about 50% relatively quickly after opening with minimal variable costs worn by NextDC after the fixed costs (land, building, fit-out, security) are born.

NextDC continues to be very attractive long-term investment that is well-positioned to grow, with a strong pipeline and attractive industry tailwinds.

Get stories like this in our newsletters.