Is it time to jump back on the NextDC and data centre bandwagon?
Australia's data centre capacity to triple by 2030, but capital requirements pose a major challenge for operators like NextDC.
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KEY POINTS
- Australian data centre capacity forecast to grow from 1,275MW to 3,200MW by 2030 at 18% annual growth rate.
- NextDC is well-positioned with strong hyperscaler relationships and contract momentum but faces significant funding requirements.
- Morgan Stanley expects the company's net debt to rise from $139.2 million in FY24 to a massive $1.83 billion by FY27.
Data centre stocks like NextDC and DigiCo REIT have been a tough hold in the past year. Despite endless headlines about AI demand and record highs for the Magnificent 7, local stocks have moved in the opposite direction.
But after months of decline, data centre bellwether NextDC has rallied to a fresh five-month high and is approaching a potential 'golden cross' – the bullish chart pattern where the 50-day moving average crosses above the 200-day moving average.
NextDC daily price chart (Source: TradingView)
Earlier this week, Morgan Stanley reiterated a bullish view on the sector, with expectations that capacity will more than double from current levels over the next six years.
Massive growth trajectory ahead
The investment bank forecasts total Australian data centre capacity will surge from 1,275MW today to 3,200MW by 2030, representing a compound annual growth rate (CAGR) of 18%. This expansion reflects the country's growing digital infrastructure needs as cloud computing and AI drive unprecedented demand.
Source: Morgan Stanley
The projected growth puts Australia on track to become a significant player in the Asia-Pacific data centre landscape, with the market expansion representing billions of dollars in potential investment opportunities.
Energy is the primary bottleneck
Despite the promising growth outlook, significant challenges lie ahead. Morgan Stanley's global survey of approximately 470 industry professionals identified energy supply as the single biggest obstacle to data centre development, with planning permissions ranking as the second major hurdle.
Energy constraints could potentially limit the pace of expansion and create competitive advantages for operators who can secure reliable power sources early.
The energy challenge is particularly relevant given data centres' massive power requirements and Australia's ongoing energy transition, which adds complexity to long-term power planning and pricing.
NextDC positioned for growth
Among ASX-listed players, NextDC (ASX: NXT) stands out as a pure-play operator with established relationships with major hyperscale cloud providers.
Morgan Stanley argues NextDC trades at an attractive valuation relative to peers when adjusted for its superior growth profile. The stock trades at around 45x EV/EBITDA with a five-year EBITDA CAGR of 22%, while global peers forecast significantly lower revenue growth of just 10%.
However, substantial funding requirements pose a key risk. The scale of projected growth demands massive investment, raising questions about how operators will finance expansion plans. Morgan Stanley expects net debt to surge from $139.2 million in FY24 to $667 million in FY25 and almost triple to $1.83 billion by FY27.
The bottom line
The data centre sector presents a compelling growth opportunity, but investors should be wary of the substantial capital requirements that result in these companies building up significant leverage. While this can amplify returns and appeal during bullish periods, it also increases financial risk and execution challenges. The silver lining is that falling interest rates should reduce borrowing costs, even as investment demand in this space shows no signs of slowing.
