Written by Sergeo Domtchenko
The restructuring of the digital economy is providing you with an endless number of opportunities. NEXTDC’s bullish 32% rise over the last three weeks encapsulates the investment potential in the evolving digital economy.
Today we will discuss NEXTDC’s value proposition, why the tech-company made headlines this week, and whether their decline over this week presents you with an opportunity?
NEXTDC in a nutshell
NEXTDC (ASX: NXT) is an innovative data centre operator. A data centre is a massive group of connected computer servers that allow organizations to store, process, and distribute their information. NEXTDC’s nation-wide footprint, of 9 data centres and 600+ cloud centre partners, allows the tech company to orchestrate critical connectivity between many Australian businesses.
NXT, through its strategic partnerships, is creating a digital ecosystem (similar to iOS) that enables businesses to be more productive, more reliable, and reduce costs. Thus, it comes as no surprise that a 30% increase in global internet traffic over the last two months is causing investors to rally behind NXT.
Why NEXTDC made headlines this week?
1) NEXTDC Completes $672M equity raising – 3rd April 2020
NXT is investing $350 million into the creation of a third data centre (S3) in Sydney. Based on the strong demand for S2, growing confidence behind NXT, and the rush towards online business during COVID-19, management expects the S3 to trigger a significant boost in sales. NXT is investing the remaining funds in growth-driven initiatives to ensure their momentum continues throughout the volatility.
Consequently, investors reacted positively to the announcement, driving up NXT by 4%.
2) MQG Sells its Shares in NEXTDC – 7th April 2020
Arguably, the most significant factor behind the plunge in NEXTDC’s share price for this week was Macquarie Group’s decision to sell its shares.
I could not find any obvious reasons for MQG selling. Thus, the only natural conclusion to be drawn is that MQG was happy to liquidate the capital gains it made off the stock since mid-December (26.8% increase).
Is NEXTDC Worth the Investment?
Before I start, I am obliged to remind our viewers that this not advice, only general commentary from my extensive research into this area.
Even before COVID-19, NXT created an impressive balance sheet. During 2018-2019 NXT grew revenue by 6.7%, and its gross profit ratio was a whopping 81.3%. Which, when compared to Akamai technologies’ gross profit ratio of 64.3%, it highlights the financial strength of NXT.
Moreover, NXT’s current balance sheet allows the company to service all of its financial obligations over the next 12 months. Providing investors with the confidence that NXT will come out on the other side of the COVID-19 tunnel.
Lastly, the demand for innovative data connectivity, the reformation of the digital economy, and the recent equity raising should push NXT’s share price to new heights.
Despite NXT’s financial strength, there a few financial holes.
For example, net profit is down by 1% year on year, NXT’s ROE is -1.3% coupled with an EPS of -$0.03.
Also, NEXTDC’s P/E ratio, which measures the market’s expectations for NEXTDC to grow its revenue, is -0.26
However, if the strong demand for NXT’s products continues and the tech company survives COVID-19, then the above financial concerns would vanish.
What positions are brokerage houses taking?
Your decision to purchase this stock is based on your own research. However, it is interesting to see what positions brokerage firms have on NXT.
|Brokerage Firm||Position||Target Price|
|Goldman Sachs||Buy||$9.70 = Price to exit at|
|Morningstar Quantitative||Overvalued||$7.94 = Fair value|
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Sergeo Domtchenko, Associate of YIG.