NextDC (ASX: NDC) reported first-half 2026 net revenue growth of 13%. Billing utilization increased 29% to 120 megawatts, which management guides to increase 2.7 times by fiscal 2027 and 3.4 times by fiscal 2028 based on the existing forward order book, given faster conversion rates for AI contracts.

Why it matters: NextDC has cited a wall of demand for data center capacity coming from both artificial intelligence and traditional cloud for several years.

  • Management increased fiscal 2026 capital expenditure guidance to around AUD 2.55 billion from $2.3 billion previously and up from $1.7 billion in fiscal 2025. The company has over 270 MW of capacity under development.
  • To help fund this growth, NextDC is seeking to develop its proposed S4 and S7 data centers in Sydney via a joint venture so it can reduce its equity interest and maximize its equity returns.

The bottom line: We increase our capital expenditure forecast in line with guidance and raise our revenue forecast from fiscal 2027 onward. Our fair value estimate remains $17. The stock is down around 11% after results and looks broadly undervalued at these levels.

  • NextDC’s price/book ratio is around 2.1 times. NextDC does not revalue its data centers each year, and we estimate its early data centers in inner-city areas have substantially increased in value.

Long view: The data center sector is attracting an enormous amount of capital from a large number of investors, and it is very difficult to gauge exactly how much capacity is going into a particular market, let alone see how this tallies with future demand.

  • However, the growth in AI is driving very strong data center demand globally, and NextDC is in a good position to capitalize, given its existing assets, reputation, and expertise.

Growth is driving very high capex, thereby decreasing free cash flow, which has totaled around negative $3.9 billion over the past four years. We increase our Uncertainty Rating to High from Medium.

NextDC is building data centers for accelerating AI compute demand

NextDC has a big opportunity in front of it, with ample room to increase its data center footprint in Australia and the Asia-Pacific region and reap the financial benefits that its larger scale should provide. The firm is already a primary provider of cloud on-ramps to the biggest global cloud providers, and we expect its importance for cloud connectivity and artificial intelligence compute power in Australia to grow.

NextDC benefits from industry trends, including increasing use of cloud computing and AI, that are driving exponential growth in data creation.

While the firm remains focused on deepening its presence in important Australian markets, which we think is smart, it is also addressing various Asian markets with operational data centers in Kuala Lumpur and Japan, with one in Auckland also planned. The Australian market is less penetrated by global companies than other parts of the world are, and NextDC has an opportunity to be a leader in the country. The firm currently has four data centers in Sydney and three in Melbourne to go along with two in Perth, two in Brisbane, and one each in Adelaide, Canberra, Darwin, and Newman. NextDC also already owns land and has plans in place to expand its capacity materially in some of these markets, especially with another three data centers in Sydney and two in Melbourne.

As NextDC gains size, we expect it will see some of the intracontinental benefits that firms like Digital Realty and Equinix have globally. Namely, it will enable its customers to use it to connect their points of presence throughout the continent and to connect to their cloud providers. We expect interconnection services to become increasingly important for NextDC as more businesses transition to hybrid cloud storage models. In 2025, interconnection revenue contributed around 8.6% of NextDC’s net recurring revenue. Given the potential capital requirements from the extreme data center demand from AI, we expect NextDC to continue to use joint ventures to lower total project cost of capital and maximize its return on equity.

Bulls say

  • NextDC is well placed to benefit from industry megatrends, including the growing adoption of cloud computing, the Internet of Things, and AI, leading to exponential growth in data creation.
  • The shift to cloud-based services increases the need for enterprises to connect to numerous cloud providers and the connection is fastest, safest and most efficient in a co-located data center.
  • With the Australian market less penetrated by the biggest global data center providers, NextDC has an opportunity to be one of the biggest providers on the continent.

Bears say

  • Rapid technological advancements could reduce the space required by tenants to store data and leave NextDC with excess capacity and margin deterioration.
  • NextDC is heavily reliant on cloud providers, which could choose to attract customers to their own facilities, undermining its business model.
  • Increasing adoption of virtual connectivity solutions may reduce demand for physical space and physical connection in NextDC’s data centers.

Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years.