The NextDC Ltd (ASX: NXT) share price has been a positive performer on Wednesday.
In morning trade, the data centre operator's shares are up 4% to $11.45.
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Why is the NEXTDC share price charging higher?
Investors have been buying NextDC shares following the release of a bullish broker note out of Goldman Sachs this morning.
According to the note, the broker has reiterated its buy rating, added the company to its conviction list, and lifted its price target to $15.00.
Based on the latest NextDC share price, this implies potential upside of 31%.
What did the broker say?
Goldman Sachs recently hosted a number of data centre meetings with a range of industry participants. These meetings have collectively reinforced its positive view on NextDC.
The broker listed four key takeaways from these events. They are summarised below:
(1) Demand remains very strong, with 'waves' of demand to continue but potentially larger and more spaced out than previously, while the quantum of deployments continues to surprise (i.e. individual orders of 20-40MW);
(2) Pricing (and hence returns) remains healthy in Australia across all operators, supporting our return expectations (we forecast 11.3% ROIC on NXT's S3 facility);
(3) NXT is likely to progress its S4/M4 facility as a JV, away from the CBD, while keeping optionality to undertake a JV for part of M3/S3; and
(4) International is strategically sound, but unlikely to progress while borders are closed.
High multiples are not a concern
While Goldman acknowledges that there are concerns around equity valuations due to rising bond yields, it believes NextDC's shares are more than deserving to trade at a premium.
Goldman explained: "We note investor concerns around the expected increase in inflation that is impacting equity valuations. However we believe the strong growth outlook for NextDC remains compelling, particularly given its hyperscale contracts have inflation escalators embedded within them."
"As a result, with NXT having pulled back -23% since its Oct-20 high ($14.10; vs ASX200 +10% ) despite subsequently upgrading FY21 guidance, we see now see a more compelling investment opportunity. With our $15.00 TP implying +36% upside, amongst the highest in our TMTG coverage, we re-iterate our Buy and add NXT to the ANZ Conviction List," it concluded.
