Skip to Content

Australian Investment Blog

ASX: DGT 29/01/2025

NEXTDC (NXT) & DigiCo REIT (DGT) – DeepSeek selloff presents attractive value

NEXTDC Ltd (NXT) $14.75

NEXTDC (NXT) is Australia’s leading DCaaS (data centre as a service), operating 15 data centres across Australia, plus two edge sites (Port Hedland and Sunshine Coast) and three offshore (Tokyo, Kuala Lumpur and Auckland). The business has materially increased its planned capacity from ~44MW as of FY17 to ~972MW as of FY23. However, NXT tumbled 7.2% on Tuesday as the potential impact of AI newbie DeepSeek reverberated through global markets. The open-free R1 large language model operates at approximately 9% of the computing power required, theoretically dramatically reducing the energy intensity and data-storing requirements weighing on demand for NXT.  We briefly looked at the implications for data centre’s in yesterday’s afternoon Match Out Report:

  • DeepSeek’s advancements may reduce AI data centre requirements, potentially reducing memory usage and required data centre capacity/extensive hardware infrastructure.
  • NXT has big pipelines of development to fill forecasted demand, which may now not be as strong, increasing the “risk premium” the market is likely to associate with the stock, at least short-term.

We bought NXT into weakness in late 2024 after the company raised $750mn for Asian expansion, and before yesterday’s sharp drop, the share price showed signs of recovery; this looks likely to be shelved short-term. During the capital raise, NXT updated its guidance for FY25, demonstrating no “skeletons in the closet”.

  • NXT anticipated net revenue and underlying EBITDA of $340-$350 million and $210-$220 million, respectively, but capital expenditure guidance rose to $1,300 -1,500 million, up from $900-$1,100 million due to said Asian expansion plans.

  The key question is whether DeepSeek could/will impact demand for data centre capacity and, therefore, demand for NXT. We do not expect it to impact near-term contracts/demand for NXT and would expect the “hyperscalers” to continue to deploy capacity to meet customer demand. For example, we see the Stargate project and Meta’s colossal increase in capex as signs that AI build-outs are not slowing, but the implementation could be tweaked post-DeepSeek’s revelations, as is often the case with evolving tech.

NXT is a growth business that hasn’t yet turned a profit due to the capital requirements of building capacity, but revenue has been growing steadily. For the last five years, NXT has boasted revenue growth at 19% per year, which is well above most pre-profit companies.  The MM site illustrates how revenue has grown from $79.3mn in 2019 to $437mn in 2024. However, following recent market uncertainty around DeepSeek, the company and space’s long-term prospects may weigh on the share price over the coming months. However, we believe NXT has a solid future supported by a valuable DA-approved landbank and ongoing demand for cloud computing, AI, and digital transformation for businesses.

  • We are ultimately targeting ~$20 for NXT, but recent events will likely delay the journey for now. If we had no position, we would use weakness to be a buyer, however our existing 5% weighting in the Active Growth Portfolio is as large as we’ll go.
NXT
MM is long and bullish NXT
Add To Hit List
chart
image description
NEXTDC Ltd (NXT)

DigiCo Infrastructure REIT (DGT) $4.22

UBS picked a great a day to initiate on DGT, with the stock down ~11% on a big rout in AI-related names, as the success of DeepSeek in China and their new AI model that was developed for a fraction of the cost (reportedly) and has significantly less chip and energy use, sent shock waves through the sector. That said, we still believe the drivers for data centre demand remain, and while equity risk premiums in the sector will increase, reducing valuations accordingly, the moves across the space yesterday were significant.

While we appreciate that it’s very hard to know how all this will play out given how dynamic and fast-moving it is, we tend to share Citi’s view that DeepSeek most likely drives further demand for data centres globally with advanced computational capabilities, high-capacity storage, robust networking, and energy-efficient designs and infrastructure rather than reduces it, as yesterday’s price action would imply. In other words, the more accessible, the lower the bar, the more use cases from a broader cohort of users.

  • UBS were involved in the listing of DGT, and when a broker/bank is mandated to list a company, research restrictions are applied for a set time post-listing. These are now over; however, we’d also caution that a listing broker will generally be positive on the stock they’ve just listed.

UBS initiated with a Buy rating and $5.60 price target, reinforcing that the bigger picture thematic are clear for datacentre demand, being 1) shift from in-house to co-location; 2) shift into cloud computing; and 3) increased data generation from the uptake of AI. DGT is an established player in the space with 13 assets across Aus / the US, with plans for 238MW of datacentre capacity, nearly 70% of which is future expansion /capacity which drives future earnings growth.

We particularly like their SYD1 facility, located in the Sydney CBD, which provides a differentiated offering for latency-dependant compute capacity, i.e. when proximity matters, and the development pipeline is solid. While it’s only early days on the listing, we reiterate that DGT looks attractive into current weakness, now trading at a 16% discount to the listing price on the 13th December 24.

DGT
MM likes DGT ~$4.20
Add To Hit List
chart
image description
DigiCo Infrastructure REIT (DGT)
image description

Relevant suggested news and content from the site

Back to top