Why I'd invest $2000 into this ASX tech stock today

The NextDC Ltd (ASX: NXT) share price closed at $6.31 on Friday afternoon, down 11% from $7.08 just over a month ago. Here's why I'd buy it today.

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The NextDC Ltd (ASX: NXT) share price closed at $6.31 on Friday afternoon, down 11% from $7.08 just over a month ago.

On top of a weak HY result released on February 27, NextDC also lowered its full-year guidance. This dropped investor confidence and triggered short selling in the market.

Is the NextDC share price in the buy zone?

NextDC develops and operates independent data centres across Australia. It has data centre infrastructure which allows enterprises to outsource their data via cloud connectivity and services to support these functions.

We live in a data-driven world that relies heavily on computing power. Data centres store and process data with its in-house IT infrastructure. As companies shift IT networks to the cloud rather than on workplace servers, it allows operations like data security and maintenance to be outsourced. The net effect is a reduction in capital expenditure. The importance of a data-storage solution to business operations is growing, keeping NextDC's technology business relevant.

NextDC has demonstrated to the global market that it's a world-class service provider. The company achieved pleasing results in its product metrics. Interconnections were up 34% to 9,982 and contracted utilisation shot up 28% to 50.4MW. Unfortunately, underlying EBITDA was up by 26% to $42.2 million, just shy of analyst expectations of $43 million. This was the reason why its share price tumbled 8% lower on the day of its announcement on February 27.

Investors should also be paying close attention to NextDC's debt levels as it comprises almost 75% of equity. It is an unprofitable company outlaying millions into scaling its capital-intensive infrastructure. NextDC's debt has more than doubled to $661 million in a year, while the operating cash flow generated over the same period was only $22 million. However, while a 3.3% OCF to debt ratio is low, the company has a high 8.96x current ratio which ensures short-term stability in cash flow (3x is considered high).

Foolish Takeaway

NextDC did downgrade its full-year guidance to $180 million to $184 million from $183 million to $188 million. However, this move was a result of recent property acquisitions and is not expected to have any impact on the expected pre-tax profit of $83 million to $87 million.

If I happened across a sweet $2,000 in my bank account today, I'd be buying NextDC shares during the drop. I believe the company has built a strong business with a defensible moat and is aggressively scaling.

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Motley Fool contributor Audrey Thehamihardja has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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.

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