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Uh-oh… NextDC shares (ASX: NXT) are down 14% – are they cheap?

Shares in Nextdc Ltd (ASX: NXT) were among the hardest hit this week, following the release of a promising Covid-19 vaccine. Is time to buy?

The NextDC Ltd (ASX: NXT) share price was among the hardest hit this week, following the release of a promising Covid-19 vaccine.

The share price fell over 14% and now trades at around $12.82 at the time of writing.

What does NextDC do?

NextDC is a data centre operator with multiple centres across Melbourne, Sydney, Brisbane, Perth and Canberra. Organisations that store critical applications and data “in the cloud” can use NextDC’s facilities to physically store this information securely.

Although labelled a tech business, this is more of an infrastructure play that requires large amounts of capital expenditure to construct new data centres.

Why did the NXT share price fall?

In my eyes, there are two main reasons as to why we seeing some particular sectors being sold off this week.

The first and most obvious is that retail and tech have been the favourites since March this year, and investors are selling out and taking some profits to reallocate towards some recovery stocks like Webjet Ltd (ASX: WEB) and Corporate Travel Ltd (ASX: CTD). I think this isn’t necessarily a bad sign, as it hasn’t changed the fundamentals of these companies too much. Rask Media writer and financial adviser Drew Meredith called this a ‘rotation’ in themes.

The second reason why some stocks are being sold off is that a reopening of the economy could actually hurt the business’ underlying operations. I recently wrote an article on Marley Spoon Ltd (ASX: MMM) which explains why I think the company falls into this category.

I think if you’re planning on buying some of these ‘dips’, you need to differentiate between dips that are more likely to be profit-taking, compared to underlying structural changes which should probably be avoided at all costs.

Why I think NextDC is a buy

NextDC has had a great run this year, and I’m of the opinion that it’ll be able to continue to perform well over the long-run, even with a vaccine and an open economy. Here’s why:

  • Some employees who have worked from home will continue to do so regardless of a vaccine outcome. This increases internet traffic flowing through data centres like those owned by NextDC.
  • Some businesses that didn’t have an online offering prior to COVID were forced to get one, and now they’re likely to continue using it. Meaning, it’s a positive structural trend.
  • Consumers who have changed their consumption habits to ones that have been facilitated by online platforms will continue these habits. Many people I know are shopping online more than ever.

These are all examples that will accelerate the shift to using online platforms, which places NextDC in an advantageous position to accommodate the increased demand in cloud-based services.

To me, this is different from sales or traffic being “brought on” on a once-off basis by government stimulus and superannuation withdrawals. I think this is an accelerated structural shift that is more likely to be ongoing in nature.

Summary

I would be happy to pick some shares in NextDC at current prices although this sector is volatile at the moment, so I would also be expecting some further swings in the share price.

For some further reading on NextDC you can read my article on NXT here.

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