Despite crashing 20 per lower, here’s why one top performing fund manager still likes Nextdc (ASX:NXT) shares

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The Nextdc (ASX:NXT) share price came crashing back to earth in early September, the ASX200 high flyer crashing 20 per cent lower after reporting FY18 profits above expectations, but guiding to a lower rate of revenue growth in FY19.

Unlike the swift punishment handed out to the share prices of some former market darlings — like Speedcast International (ASX:SDA) and ARQ Group (ASX:ARQ) — from August 31, Nextdc shares fell two or more percent for seven days in a row such that at around $6, they now trade around 20 per cent off their recent peak.

Writing on Livewire, Andrew Mitchell of the top performing fund manager Ophir Asset Management, says Nextdc has been Australia’s most successful data centre operator.

The business generates $161 million of revenue from 972 customers utilising 8 data centre locations across Australia. Nextdc is in the process of building three more data centres.

Source: Company presentation

Data creation and consumption — think YouTube, Nextflix and Facebook — has exploded in recent years, with data centres being the critical pieces of enabling infrastructure. They are the four walls in which ‘the cloud’ lives.

Ophir likes the space, and says Nextdc is an attractive long-term investing proposition. The fund says Nextdc operates in an industry with high barriers to entry and long-term structural tailwinds.

Utilisation of existing data centres sits at 92 per cent, and Nextdc’s more mature centres reach break-even within one year of operation. After the centres are built and costs are recovered, every incremental dollar of revenue becomes pure profit.

Although the competitive landscape has grown tougher, Ophir say Nextdc management remain supremely positive on the opportunity set ahead of the business.

Ophir also sees opportunity for Nextdc to expand internationally.

With a market capitalisation of around $2 billion, Nextdc shares trade on about 23 times forward EBITDA. While not traditionally cheap, they do offer a good growth profile, something investors are obviously keen to pay up for.

Nextdc shares don’t look cheap, but these 3 shares do…

Combining countless hours of research with over 30 years of hands-on stock market investing experience, The Capital Club’s founder Bruce Jackson has just published his definitive list of 3 Cheap and Good ASX Stocks for 2018.

Nextdc was not one of them, but the list does include one tiny gold mining stock, and the company one top fund manager calls the cheapest stock in the ASX 100.

Find out why these 3 Cheap and Good Stocks could be better buys than Nextdc. But you better hurry… these stocks may not stay cheap for long.

See the 3 stocks

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Contributors to this article may own shares in some of the companies mentioned in this article. The Capital Club has a thorough disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
Bruce Jackson has 30 years of hands on investing experience. He is passionate about stock market investing, running his own portfolio and SMSF. His focus is on small cap growth stocks. You can contact Bruce at brucej@thecapitalclub.com.au