Data Centre Stocks: Navigating Growth and Challenges Ahead
In the past year, stocks in the data centre segment, such as NextDC and DigiCo REIT, have faced considerable difficulties. Despite the ongoing discussions surrounding AI demand and the impressive performances of major tech stocks, local data centre equities have struggled, often going against the broader trends.
After several months of decline, NextDC has recently rebounded, reaching a fresh five-month peak. It is nearing a significant ‘golden cross’ pattern on the charts — a bullish indication where the 50-day moving average surpasses the 200-day moving average.
Forecasting Growth in the Data Centre Sector
Morgan Stanley has reiterated a positive outlook for the data centre sector. The bank predicts that capacity in Australia will more than double from current levels in the next six years. Specifically, they expect total data centre capacity to increase from 1,275 MW today to 3,200 MW by 2030, translating to a compound annual growth rate (CAGR) of 18%. This growth reflects the escalating demand for digital infrastructure driven by cloud computing and AI technologies.
The anticipated expansion positions Australia as a key player within the Asia-Pacific data centre landscape, creating numerous investment opportunities worth billions.
Energy Supply: A Critical Challenge
Despite these optimistic forecasts, the sector faces significant challenges. Morgan Stanley’s global survey of nearly 470 industry professionals identified energy supply as the primary barrier to data centre development, followed closely by planning permissions.
The limited availability of reliable energy sources could impede rapid expansion and favour operators who secure dependable power earlier in the development process. This issue is especially pressing given the immense energy demands of data centres and Australia’s ongoing transition to renewable energy, which complicates long-term energy planning and pricing.
NextDC: A Key Player Positioned for Growth
Among companies listed on the Australian Stock Exchange, NextDC (ASX: NXT) emerges as a notable pure-play operator, with established connections to major hyperscale cloud providers.
Morgan Stanley highlights that NextDC’s valuation appears attractive compared to its peers when considering its superior growth trajectory. The company is currently trading at around 45 times EV/EBITDA, with a projected five-year EBITDA CAGR of 22%, while its global counterparts foresee much slower revenue growth at just 10%.
However, the considerable funding requirements present a substantial risk. The anticipated scale of growth necessitates massive investments, raising concerns about how operators will finance their expansion plans. Morgan Stanley projects NextDC’s net debt to increase dramatically from $139.2 million in FY24 to $667 million in FY25 and potentially reach $1.83 billion by FY27.
Conclusion: Weighing Opportunities and Risks
The data centre industry offers promising growth prospects, but investors need to be cautious about the significant capital demands that can lead to heightened leverage. While such leverage might amplify returns during bullish market scenarios, it also escalates financial risks and execution challenges.
On a hopeful note, declining interest rates could alleviate borrowing costs, even as investment demand in the data centre segment remains robust, signalling continued opportunities for growth and development in this essential industry.
