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Stock Of The Day - NEXTDC (BUY)

As per the Gartner report, the number of data centers in Australia has been decreasing as businesses are reorganizing their data center investments. Just 11 data centers are classified as large data centers  with at least 1,000 racks and/or larger than 1860m2, while 78 are enterprise data centers with at least 250 racks and/or larger than 465m2, among ~62,314 data centers in Australia. Majority of the data centers are categorized as small deployments in the computer rooms within an office set up.

However, the next generation data center has been changing to a mix of colocation, cloud services and on-premise. Moreover, rapid increase in the number of connected devices is leading to a tremendous Big Data, which requires high-end processing to process it into useable information. This is leading to the rise in demand for cloud and compute resources which can be ordered, delivered and changed on demand.



Benefits of IoT activities (Source: Company Reports)

NEXTDC is seeking to target this market opportunity by strengthening its managed and hybrid cloud services as well as datacenters in the region. Moreover, the firm is able to attract customers for Asia Pacific region who are seeking to grow their presence in Australia.

During the month of April, CloudFare the leading internet performance and Security Company entered Melbourne through NEXTDC M1 data center. Around >5% of the global web requests pass through CloudFare’s network every month. By adding a data center in Melbourne, CloudFare intends to improve the speed and reliability for its 2+million customer applications in the Oceania region.

Fastrack has extended its partnership with NEXTDC during last month, to leverage NEXTDC’s private, high speed, low-latency connections to Microsoft ExpressRoute for offering Fastrack’s clients with secure access to its local Azure cloud platform. With this move, Fastrack is now among the 20 select Premier Partners. 


Leveraging growing hybrid cloud opportunity

Avanade, a global business technology solutions provider of Hybrid Cloud conducted a global study from 1,000 global C-level executives, business unit leaders and IT decision-makers. Based on the study 69% agree that executing a hybrid cloud strategy is among their major areas of focus in 2015. Meanwhile, 65% said that they will be decreasing all their data centers in future and prefer public or hybrid cloud-based solutions. Around 73 % approved that implementing a hybrid cloud solution in their organizations gives an edge to their firms against competitors.

NEXTDC wants to capture this hybrid cloud opportunity coming from enterprises and has even recently teamed up with TPG to promote hybrid cloud opportunities. By identifying that speed is the major inhibitor for enterprise to adopt hybrid cloud, TPG and NEXTDC are seeking to offer WAN faster than the LAN’ as TPG’s network services enable users to remove hindrances and facilitate customers data to be hosted in data center like NEXTDC’s M1 data center which are highly reliable and connected.

The company has made $221 million expenditure till date to deliver 20.25MW of capacity. NEXTDC also made investments for additional capacity at S1 and P1 centers during first half of 2015. In fact P1 Perth data center already has a host of colocation customers with around 20 carriers and service providers indicating the growing demand for this facility, even though it’s inaugurated just a year ago. Expansion at S1 in Sydney and P1 at Perth are undergoing.


Facilities expansion (Source: Company Reports)

The company’s S1 data center third hall in Sydney is under construction to add 2.8MW. Moreover P1 data center’s first data hall at Perth has expanded to 1.4MW, while the second data hall is also ready, adding an extra 1.4MW. Additional rack is ready at C1 data center at Canberra. Several IT companies are building partnership with NEXTDC’s M1, P1 and S1 data centers given its high quality product offerings and a single engagement services in the entire nation. 


Facility Capacities and contracted utilization (Source: Company Reports)

Moreover, major IT providers are already leveraging NextDC’s national datacenter network to offer services in Australia. CenturyLink reported in April that it will be strengthening its hybrid cloud services presence in Australia through NextDC. CenturyLink intends to provide managed hosting, colocation and cloud services though NextDCs network of datacenters in Sydney, Melbourne, Brisbane, Canberra and Perth. Dicker Data also joined NEXTDC to offer affordable access to its SMB partners.


NXT Daily Chart (Source - Thomson Reuters)

The shares of NEXTDC have posted a year to date returns of 21.8%, partly attributed to the better than expected first half of fiscal year 2015 results and growing partnerships. Meanwhile, the shares has been under pressure from few months, declining over 11.9% in the last three months and around 6.9% in the last four weeks. We believe this correction to offer buying opportunity to the investors, as the growing clients for the firm’s data centers and hybrid cloud services, can boost the firm’s performance in the second half of 2015.

Based on the foregoing, we give a “BUY” rating to the stock at the current price  of $2.29.