Nextdc Ltd (ASX: NXT) shares have been on a roll lately.
They have rebounded significantly following the "Liberation Day" dip. Since 7 April, NextDC is up an impressive 43%.
NextDC is a fast-growing data centre operator that's been rapidly scaling to meet surging demand for high-performance computing. Underpinning this is the artificial intelligence revolution that's captured investors over the past few years.
Last night, the poster child for artificial intelligence, Nvidia Corp (NASDAQ: NVDA), reached another new all-time high, lifting its market value to US$3.75 trillion and making it the world's most valuable company. This serves as a reminder to investors that AI is still very much in favour.
However, given their recent surge, NextDC investors may be wondering whether they are fully valued or have further to run.
Let's see what Macquarie Group Ltd (ASX: MQG) had to say.
In a 25 June research note, the broker reiterated its outperform rating on the stock.
The broker also affirmed its price target of $22.10. Given that NextDC shares are changing hands today for $14.38, that implies 54% upside over the next 12 months from here.
When issuing their note, the broker cited three key drivers.
Firstly, hyperscalers, noting:
Alongside Amazon's recent budget increase, industry conversations confirm that recent product releases reflect Google and Oracle are active in the leasing market, as well as significant activity amongst Challenger and Neoclouds. Lastly, with the BIS policy relaxed, Asian investment, specifically Bytedance (who was active in the leasing market prior to compute restrictions) can return. This validates the attractiveness of the Australian market, reinforcing views established in prior research.
Secondly, government support, writing:
Recent Hyperscaler news flow has been jointly released with the Federal Government, who are more constructive on digital infrastructure. Additionally, State governments have presented at M4 and S3 in the past fortnight. NSW has established the Infrastructure Delivery Authority (IDA) to expedite approval and development processes, announced at S3. This bodes well for an Australian Stargate Global deal.
Thirdly, the ability to benefit from pent-up Enterprise AI demand:
A lack of chip availability is leaving many enterprises waiting on server orders. Moreover, enterprises are beginning to understand the lack of long-term operating leverage if all of their AI infrastructure relies on a single Hyperscaler. With NVIDIA's DGX Cloud certification, NXT can satisfy this demand.
However, the broker did flag "slower-than-expected take-up of DC demand either from a structural level or competition from other DC providers" as a key risk that could impact its valuation.
Morgans has also placed a price target of $18.80 on NextDC shares. The broker believes that "significant demand for cloud computing and AI-related digital infrastructure is going to underpin attractive returns and long-term growth".
That suggests 31% upside from here. While not as optimistic as Macquarie's price target, this return is still compelling.
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