One S&P/ASX 200 (INDEXASX: XJO) tech share that I think is worth keeping a very close eye on is data centre provider Nextdc Ltd (ASX: NXT), which has had impressive share price growth over the past 5 years.
Rapid rise of cloud computing
The Australia data centre market has come leaps and bounds over the past 5–10 years, as data storage has transitioned from being stored 'on premise' to being stored in 'third party' data centres, driven by the rapid rise in cloud computing.
Global technology research firm Gartner predicts that 80% of all organisations will shift their workloads to third-party data centres by 2025.
Number one local data centre provider
In the data centre service market, 'scale' really matters.
When NextDC first came onto the market just under 10 years ago, cloud computing was still in its infancy and the data centre market locally was dominated by a few large global providers. Most of these were US-based companies including Equinix, Global Switch and Digital Realty, all of which have established a sizeable presence in the Australian market.
Some analysts thought that locally based companies such as NextDC would struggle to compete with these global giants which can leverage global economies of scale and offer international options to clients.
However, NextDC has proved these pessimists wrong. Over the last few years it has continued to expand rapidly, and this expansion shows no signs of slowing down.
This strong growth is reflected in impressive share price growth over the past 5 years, with the NextDC share price rising from $1.78 in January 2015 to today's price of $7.58 – a very impressive 325% gain
NextDC is currently the largest locally based provider by a long margin, and the company has a nationwide network of Tier III and Tier IV data centre facilities throughout Australia. It continues to expand rapidly with number of data centres under construction.
Strong recent financials
For FY19, overall revenue was up by 15% to $179.3 million, while underlying earnings before interest, tax, depreciation and amortisation (EBITDA) was up by 13% to $85.1 million.
In its FY20 outlook, NextDC anticipates revenue to be in the $200–206 million, range, up 12–15% on FY19. It expects underlying EBITDA to expand by 17–23% as the company achieves greater scale and efficiencies through its new data centres. These are very impressive results for the data centre provider.
Foolish takeaway
Although the data centre game is highly capital intensive, with very large upfront costs to build new data centres, once the infrastructure is in place operators are well positioned to reap the benefits further down the track.
As NextDC continues to grow its market share, I believe that it is well placed to see strong revenue and profitability growth over the next 5 years. This makes it an excellent tech share to buy and hold for the long-term, in my opinion.
