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Data Centre Stocks Experience Turbulence Amid Promising Developments
Data centre stocks, including NextDC, Goodman Group, and DigiCo REIT, have been under heavy selling pressure this year, with declines exceeding 10% and DigiCo experiencing a staggering plunge of 36%. The downturn has primarily stemmed from tariff issues and broader economic uncertainties, exacerbated by two significant factors:
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Microsoft Suspends Expansion Plans: In mid-March, Microsoft announced the cancellation of ambitious plans for new data centres across the US and Europe, which were projected to produce about 2 gigawatts of power. Analysts from TD Cowen attribute this halt to an oversupply of AI-oriented computing clusters saturating the market.
- Warning of a Potential Bubble by Alibaba’s Chairman: Joe Tsai, Chairman of Alibaba, cautioned that the rapid construction of data centres is outstripping the actual demand for AI services. He noted that tech giants, investment funds, and developers are hastily building facilities in both the US and Asia, often without a clear customer base to justify the investments.
Despite the prevailing bearish sentiment, recent earnings reports from several leading companies suggest a more optimistic outlook for the sector.
Positive Earnings from Major Players
Recent earnings releases from the ‘Magnificent Seven’ companies—including Meta, Alphabet, Amazon, and Apple—have not only surpassed market expectations but also underscored a commitment to significant AI investments:
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Alphabet maintained its fiscal year 2025 capital expenditure guidance at approximately $75 billion, with a focus on AI infrastructure. CEO Sundar Pichai noted that AI-driven search summaries now attract 1.5 billion monthly users, enhancing the effectiveness of advertising. The increased demand for AI services has bolstered cloud revenue, offsetting declines in search revenue.
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Amazon has projected capital expenditures of at least $100 billion for FY25, with most allocated to AWS and AI infrastructure. CEO Andy Jassy remarked on the “significant signals of demand” for AI services, revealing that growth in this sector is occurring at more than three times the pace of AWS’s early years.
- Meta raised its FY25 capital expenditures outlook to between $64 billion and $72 billion, up from the previous estimate of $60 billion to $65 billion. This increase is driven by investments in AI data centres and rising hardware costs due to tariffs. CEO Mark Zuckerberg highlighted the growth of Meta AI, citing nearly 1 billion monthly active users and a 7% increase in conversions for businesses utilising its image generation tools.
These positive earnings reports contributed to a rally in local data centre stocks; NextDC saw a 4.2% rise, while DigiCo surged by 6.3% on April 30, following the earnings announcements from Meta and Alphabet.
NextDC Reports Robust Utilisation Growth
NextDC (ASX: NXT) offered an encouraging update on its utilisation and order book, revealing:
- The data centres in Victoria reported 114MW in contracted utilisation, representing 161% of the built capacity of 70.5MW as of December 31, 2024.
- Group-wide contracted utilisation increased by 30% to 228MW, approaching Goldman Sachs’ full-year forecast of 229.2MW.
- The forward order book surged by 54% to a record 127MW, with new contract revenues anticipated to commence in FY27.
- FY25 capital expenditure projections were raised by $100 million to a range of $1.4 billion to $1.6 billion.
Goldman Sachs’ FY25 utilisation projection closely aligns with NextDC’s current figures. Following the report, NextDC shares opened up 3.7% and continued trending upwards to close with a gain of 6.3%. However, its peers lagged behind, with DigiCo remaining flat and Goodman Group only marginally up by 0.1%, indicating ongoing market caution and a focus on company-specific performance.
Conclusion
The recent updates from NextDC injected a note of optimism into the data centre sector, challenging the negative outlook stemming from Microsoft’s halted expansion plans and Alibaba’s bubble concerns. With a strong order book signalling robust demand, NextDC’s share price rebounded sharply. Nonetheless, the muted reactions from competitors like DigiCo and Goodman Group suggest that investors are continuing to weigh the risks on an individual company basis, maintaining a cautious stance despite the potential for growth in the sector.
