NextDC (ASX.NXT) announced reduced fiscal 2027 guidance of 22% to a midpoint of $487.5 million for net revenue, 36% to a midpoint of $255 million for adjusted EBITDA, and 14% to a midpoint of $4,750 million for capex, reflecting delays to electricity network upgrades supplying its M3 site.

Why it matters: NextDC’s stock fell around 42% in response to the guidance changes, having already fallen 34% since its full-year results announcement, but we see this selling as overdone.

  • While earnings from this site will likely be delayed and may be reduced should alternative power costs be more expensive, we don’t see such a large reduction in the business’ medium-term outlook. Its assets, both current and planned, are still in great demand.
  • Management will pause future land acquisitions and capital expenditure on projects not backed by customer contracts until it has more clarity on M3 revenue. It has no plans to raise equity and is in discussions on a joint venture for the S4 data center.

The bottom line: We decrease revenue, EBITDA, and capex forecasts in line with guidance. We reduce our fair value estimate for NextDC to $12.00 from $15.60 previously. NextDC’s price/book ratio is around 0.8, with most data center companies trading at well over 1. We see it as undervalued at these levels.

Long view: Community concerns over data centers may increase developer costs and force new data centers further away from built-up areas. However, this will affect all developers, will likely be factored into new contracts, and will likely make existing data centers even more valuable.

  • Absent a major setback for artificial intelligence development, we expect data center demand to remain very strong and believe NextDC is still well positioned to capitalize on this, given its existing assets, supplier relationships, reputation, and expertise.

NextDC hit by M3 electricity delays, but its strong long-term growth prospects remain

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 artificial intelligence, 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 use joint ventures to lower the 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 connections in NextDC’s data centers.

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