NextDC shares among data centre operatives feeling the scepticism of fund managers

Australia is among the hottest data centre markets globally but the hype hasn’t convinced a significant number of funds managers which have shorted big-name stocks.

NextDC ‘s $100m A1 Adelaide data centre.

Australia is the second-hottest data centre market in the world but not everyone believes the hype.

NextDC in particular has been targeted by short sellers unconvinced about its valuation and prospects in a competitive, fast-moving market.

A run-up in its share price in the past month – the stock has gained 36 per cent since the April low – has some fund managers questioning their short position, but others are holding firm.

“We continue to have a negative view on NextDC. It’s one of the short positions in our portfolio and that has worked in our favour. We just don’t think it looks as strong as its competitors,” Acadian Asset Management portfolio manager Zhe Chen told The ­Australian.

“Everything we do is peer relative. So, looking at the cash ­positioning of NextDC relative to its peers, it doesn’t look as strong as others.

“We also factor in institutional endorsement, particularly on the sell side, for a company of this size, and we’re seeing less interest from analysts in terms of coverage of the company. That’s generally not a positive indicator for a stock,” Dr Chen said.

So far, shorting NextDC has paid off for Acadian; it helped push the fund’s Australian long short equity fund to third place out of 125 funds in Mercer’s latest Investment Performance Survey.

The fund, which uses data and AI to pick its winners, returned 11 per cent over the 12 months to March 31.

NextDC’s Darwin facility.

Even with its recent share price surge, NextDC is still trading well below sell-side price targets.

Wilsons Advisory has a price target of $18.10 on the stock, which closed on Friday at $13.65, while UBS thinks it can get to $19.

Long short fund Australian Eagle Asset Management has been shorting NextDC for a little under a year. Since then, the stock is down about 25 per cent. But its recent pop on an update that revealed better-than-expected contract wins means the fund may need to reconsider its position, portfolio manager Alan Kwan said.

“There’s been a period of indigestion with NextDC,” Mr Kwan said. “They’ve done two big capital raisings in 12 months and they had a lot of capex coming through. They needed to announce some big contract wins to fill that supply. Obviously their announcement this week seems to support the rollout, so we may need to reassess it a little bit.

“We can see the long-term growth story with data centres; it’s just in the interim there’ll be ups and downs along this trend line.”

New Zealand’s Infratil, which owns half of CDC Data Centres, is Mr Kwan’s preferred pick in the space. “CDC is the grandaddy of data centres; they’ve been doing this for a very long time, and they have a really good position with the federal government. They started out in Canberra, and they’ve had the inside run with the government. They’ve got the ASIO certification, so from a customer perspective you’d think they’re the most secure,” he said.

“It’s a bit of a pair trade, where we liked Infratil and Canberra Data Centres because we thought it was undervalued compared to the rest of the sector versus (NextDC, which is overvalued).”

He has another “very small” short position on a second data centre company but would not disclose which one.

He’s also sceptical on how quickly or how well Goodman Group can meet its ambitions of transforming its business from warehouses to data centres.

“It’s a fantastic pivot but how quickly can they do it? AirTrunk, NextDC, CDC, they’ve been doing this for decades. Goodman are really playing catch-up here.”

US asset management giant Blackstone spent $24bn last year to acquire local data centre play AirTrunk and said it would pump $US100bn into the sector in the coming years. The asset manager is reportedly considering hiving off some of AirTrunk’s Australian data centres to free up funds to reinvest into AirTrunk to expand in other markets.

Quay Global Investors is a long-only fund so does not short stocks. But the fund won’t buy into Australian data centres because it only wants the best in class, portfolio manager Justin Blaess said. “We’ve always avoided them because of pricing but aside from that we still think it’s better to go towards the biggest and the ones with land banks in the best locations.

“From our perspective, the US ones are the best, because all the Western AI training and AI tenants are based in America. They are the ones with the established land banks and data centres.”

Quay Global holds a position in US-listed data centre landlord Digital Realty, which owns land and data centres in some of the best locations in the US.

“The ASX operators, they’re promising to build in Malaysia, Indonesia and Japan. And there will be some leasing in those places but I think people are getting ahead of the theme in believing all of them will be leased.”

Originally published as NextDC shares among data centre operatives feeling the scepticism of fund managers