The bull case for NextDC: AI demand to be 3-5 times cloud demand

NextDC (ASX: NXT) shares traded pretty much vertical on Wednesday, up 0.7% as the market opened and closed 11.8% higher at record highs of $17.15.

The company's first-half results not only exceeded analyst expectations but also highlighted that its deals are growing in both size and scope.

NextDC first-half FY24 – Key numbers

• Total revenue up 31% to $49.4 million

• Underlying EBITDA up 5% to $102 million

• Invested $220 million to progress capital development projects

• Liquidity (cash and undrawn debt facilities) of $2.1 billion at 31 December 2023

• Reaffirmed full-year guidance of $400-415 million revenue and underlying EBITDA of $190.200 million

• Reaffirmed full-year capex guidance of $850-900 million

The first-half revenue and EBITDA figures were a respective 4% and 12% ahead of Goldman estimates.

NextDC 12-month price chart (Source: Market Index)

Goldman: Growth pipeline exceeds 1GW for the first time

Goldman retained a Buy rating and raised its 12-month target price by 13% to $18.80. The analysts highlighted a few key highlights from the result, including:

• Over 4.5MW of new contracted capacity has been won since August 2023, attributed to strong Enterprise contribution and network edge deployment in P2

• Growing expectations for FY24 to deliver record contract wins was reiterated

• NextDC said its pipeline has exceeded 1GW for the first time on record and already seeing 100MW+ in singular AI related contracts in Australia

• For perspective, NextDC had a contracted utilisation of 140.9 MW as of 1H24, with 53.4MW of capacity in progress

• NextDC said it could lease its entire ~300MW S4 campus to a single customer if it made sense from a strategic and returns perspective

• A $600 million Bangkok data centre is being evaluated as NextDC builds its APAC presence

Citi: Upside to guidance

Citi retained a Buy rating with a $15.45 target price. "Overall, we continue to see upside to FY24e EBITDA guidance, in spite of the step-up in costs in 2H and see NXT as a way to play the secular shift to cloud as well as AI," the analysts said in a note on Wednesday."

The analysts believe AI training and inference demand (inference demand refers to the computational resources required to process and generate responses) as adding to its demand pipeline. "Interestingly, NextDC sees AI demand as 3-5 times cloud demand," noted Citi.

UBS: "Where the cloud lives and AI thrives"

UBS maintained a Buy rating with a $20.10 target price (up from previous target of $17.20).

"NextDC is looking to accelerate future builds and expansion plans, with plans for S4/S5 submitted for development activity and mentions of future AI factories. In our view, NextDC is in a favourable position, benefitting from both strong baseline cloud demand," says UBS.

The analysts flagged inventory as a possible constraint to near-term growth, with 106% of built capacity contracted, up from 92% in the second-half of FY23.