Why Amazon's results point to a big upside for this fledgling ASX stock

Don't be put off by the sky-high valuation of Nextdc Ltd (ASX: NXT) as the stock actually represents good value if you looked at Google and REA Group Limited (ASX: REA).

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Those worried that the 66% surge in the share price of Nextdc Ltd (ASX: NXT) and its price-earnings (P/E) multiple of over 100 times puts the stock in the stratosphere of the value scale may want to take a look at the latest profit results from US tech giants.

These tech leaders in the data centre space, such as Amazon Web Services (AWS), Alphabet Inc (Google) and Microsoft Corporation, continued to report huge increases in earnings.

This means two key things: the cloud computing market which relies on data centres is far from maturing; and even with the tech titans dominating the industry, the market has not hit a saturation point.

That's why investors shouldn't be too concerned about the seemingly high valuation on NextDC given the bright growth outlook for the $2.3 billion market cap stock, which is a fraction of the value of its US competitors.

Citigroup noted that AWS posted growth of 49% in the latest quarter compared to 45% in the December quarter and 42% in the quarter before that. Google and Microsoft both delivered growth rates that are twice that of AWS although they are coming off a much smaller base.

"NXT is the only way you can play this in the Aussie market if you want leverage to the cloud demand thematic," said the broker.

"Citi forecasts global cloud revenues to double over the next three years and Australia's public cloud services market is expected to grow 36% to $5.4bn over 2017-2019."

This is why you shouldn't be put off by NextDC's 110 times P/E (based on consensus FY19 estimates). If you looked at ASX-listed online heroes REA Group Limited (ASX: REA), Carsales.Com Ltd (ASX: CAR) and SEEK Limited (ASX: SEK), you'd probably find they traded on outrageous multiples in their early years as well.

Most analysts are also not factoring in high utilisation rates at some of NextDC's data centres. Given the robust demand outlook for cloud computing, this means there is potential upside to brokers' price targets on the stock which currently stands at $7.23 a share.

On the downside, NextDC is embroiled with a dispute with its landlord Asia Pacific Data Centre Group (ASX: AJD), which is proving to be an unwelcome distraction for the company although I do not think this poses a significant risk to NextDC.

But NextDC isn't the only emerging tech stock with the potential to become ASX 200 (Index:^AXJO) (ASX:XJO) heavyweights. The experts at the Motley Fool have uncovered three future "disruptors" that could follow the footsteps of REA Group.

Click on the free link below to find out what these stocks are and why they should be on your radar for the year ahead.

Motley Fool contributor Brendon Lau owns shares of NEXTDC Limited. The Motley Fool Australia has recommended carsales.com Limited, REA Group Limited, and SEEK Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »