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.
MM is long and bullish NXT
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