CRITERION: How investors can play the AI-fuelled data centre game

The data centre mania continues apace, but not everyone is a buyer.

Pic via Getty Images

• Despite fears of ‘peak data’, data centre demand is tipped to grow

• Next DC and Macquarie Technology Group are in expansionary mode

• Not everyone is a buyer in the space

 Large ugly square edifices containing racks and racks of computer servers suddenly have become fascinating to investors.

We’re referring of course to data centres (DCs), repositories of trillions of terabytes of cloud data generated from our daily digital lives and accentuated by the advent of artificial intelligence (AI).

‘Cloud’ does not mean the data wafts ethereally in the atmosphere – it has to be stored somewhere.

In effect DCs are glorified warehouses, but with infrastructure to allow the computers to ‘talk’ to each other. Crucially, they keep the equipment cool and secure and tap an adequate energy supply and lots of power is needed.

Amid an unprecedented DC land grab, how much DC supply is too much?

Macquarie Technology Group (ASX:MAQ) CEO David Tudehope says a couple of months ago investors were pondering ‘peak DC’ – but if anything the opposite has happened.

“The growth of AI and the acceleration of the cloud has soaked up all the supply,” he says.

Tudehope notes that AI demand in Australia is still in its early days, with most supply from the US giants.

The European Union, he says, is “encouraging” AI platforms to host data locally for privacy and other reasons.

 “Those dynamics have yet to arrive in Australia, but we firmly believe they will.”

Private equiteer Blackstone and Canada’s CPP in early September acquired AirTrunk for an enterprise value of $24 billion – the payday of a lifetime for founder and Bangladeshi immigrant Robin Khuda.

The only ASX-listed pure-play DC operator, NextDC (ASX:NXT) raised $550 million in an institutional placement and this week closed a $200 million share placement plan.

The funds are earmarked for a mega Asian expansion with a development already underway in Kuala Lumpur. The company owns 17 DCs here.

Macquarie Technology in April raised $100 million partly to fund the $174 million purchase of land and buildings at its Macquarie Park DC Campus in western Sydney.

Macquarie has five DCs in Sydney and Canberra and is looking to build its sixth.

Tailored for AI, its IC3 Super West facility at Macquarie Park is being expanded from 38 megawatts to 45 megawatts, at a vaunted cost of $350 million.

“What that means is we can cope with higher density of power and we have smarter ways of removing the heat that power generates,” Tudehope says.

“Until now, the problem with AI in cloud centres is that every second rack has had to be empty, or too much heat builds up.”

Macquarie’s business also includes its traditional telecom arm, as well as government and cloud services.

But given the DC  division last year accounted for only 19% of total revenue of $309 million but 32% of underlying earnings, Macquarie is happy to be perceived as a DC play.

Further down the pecking order, 5G Networks (ASX:5GN) operates fibre and cloud networks but also owns five data centres in Melbourne, Sydney, Adelaide and Brisbane.

5G last year hoisted revenue by 8 per cent to $49.3 million, with a $2.9 million underlying loss.

Intriguingly 5G has a $40 million market cap, with $71.2 million of cash following the sale of its domains business for a pre-tax $93 million last December.

While the DC mania continues apace, not everyone is a buyer with Global Data Centre Group (ASX:GDC) selling its AirTrunk interest for $23 million.

In June, the fund sold its Malayan DCs for $39 million and in May 2024 divested its stake in Europe’s ETIX Everywhere for $175 million.

Shares in the now DC-less GDC fell 7 per cent after the Airtrunk divestment, which goes to show that investors prefer ugly square high-tech edifices over a likely fistful of cash in a capital return.

This column does not constitute financial product advice. You should consider obtaining independent advice before making any financial decision.