The Nextdc Limited (ASX: NXT) has been a top performing ASX tech share in 2020. However, I think the outlook could be even better than is currently priced in by the market.
What does Nextdc do?
Nextdc is an Australian data centre operator with centres across Australia catering to retail and wholesale customers.
Heightened diplomatic tensions have put the spotlight on data security and sovereignty which has boosted demand for Nextdc’s services.
There is definitely some challenges ahead for the Aussie economy thanks to the onset of the coronavirus pandemic.
However, I think things are looking good for Nextdc’s data centre industry with a focus on remote working and increased cybersecurity.
Why the Nextdc share price can rocket higher
A Research and Markets report from May 2020 estimates the Australian data centre market will reach $6 billion by 2025. That represents a compounded annual growth rate of 3.4% over the next 5 years.
That’s good news for the Nextdc given the Aussie company is already a market leader. I see a few paths to further growth for Nextdc in the next few years.
The most obvious is that Nextdc continues to expand its capabilities across Australia with organic development. This could help the Aussie company capture more market share and increase its value through growth.
Another option is that Nextdc just maintains its market share while the addressable market continues to grow. I think the demand environment is strong particularly as more companies beef up cybersecurity and explore operational flexibility with work from home arrangements.
The final option that I see is inorganic growth through acquisitions. While this might increase Nextdc’s size, I think it would be negative for the Nextdc share price.
Acquisitive companies often pay a premium for taking over the target business. That acquisition is based on perceived “synergies” or operational efficiencies from integrating the new business.
However, historically mergers and acquisitions haven’t been great for the acquirer’s shareholders. That means any new deals to buy smaller competitors could see the Nextdc share price fall lower.
Foolish takeaway
The Nextdc share price has already rocketed 82.1% higher to $11.89 per share. However, if the company can realise further organic growth, I think it could be climbing into the ASX 20 by 2025.
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More reading
- How to invest in ASX shares in uncertain times?
- Why I’d buy Afterpay and other ASX tech shares at record highs
- ASX 200 down 0.9%: Costa impresses, Harvey Norman profits grow, Appen downgraded
- 5 things to watch on the ASX 200 on Friday
- NEXTDC share price on watch after hitting the high-end of its guidance in FY 2020
Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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