Why this fund manager is overweight Nextdc Ltd shares

NextDC Ltd (ASX: NXT): Buy, hold, sell?

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Brisbane-headquartered data centre operator NextDC Ltd (ASX: NXT) tends to divide the bulls and bears as to its investment credentials given it trades on a high multiple of its profits and revenues.

As at 1 April 2019 the data centre operator had 13% of its outstanding scrip short sold by speculators betting that the share price will fall in the near future.

However, as an operator of data centres NextDC has a strong track record and powerful tailwind in the ever-rising demand for data storage from enterprises generating more and more data online.

Once the significant initial capital expenditure commitments to construct data centres are met they also tend to be quite high profit margin operations as they require little ongoing capex, while charging enterprises high fees to rent huge amounts of available capacity.

Melbourne-based professional investor Yarra Capital also has an 'overweight' position in NextDC shares:

"We continue to believe the business is structurally set to benefit from the increasing adoption of cloud technology and is accelerating its expansion to meet the demands of its clients. To this end, the company is currently building three new data centres which will support significant medium to longer term earnings growth. The outlook for NXT appears attractive given the company's growth profile, infrastructure- like characteristics at maturity, and supportive valuation."

This afternoon NextDc shares change hands for $6.04 not far off a 52-week low of $5.61.

Therefore for investors who believe it can meet its capital expenditure commitments while managing its balance sheet the stock could be an opportunity.

Others in the data centre and internet services space to have suffered a tough time recently include Vocus Group Ltd (ASX: VOC) and Telstra Corporation Ltd (ASX: TLS).

Motley Fool contributor Tom Richardson owns shares of TPG Telecom Limited. 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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