As the world’s hunger for data combines with the emergence of the cloud, digitisation, the Internet, robotics and artificial intelligence (AI), a compelling investment thematic has emerged in data centres, which are the invisible workhorses that make these 21st Century technological advances possible. It’s the new “logistics” – where fulfillment centres, distribution centres and warehouses became prized assets in the back of the surging growth of e-commerce over the last decade, so now are data centres following.
The sheer amount of computing power required for new generations of AI technology means a burgeoning amount of data centres worldwide. Data centres are measured in megawatts (MW) of electrical demand, of which number about one-third is used in cooling, and two-thirds in the actual IT loads. According to McKinsey, US data centre power consumption alone is expected to reach 35 gigawatts (35,000 MW) by 2030, up from 17 gigawatts in 2022. Currently, data centres account for more than 4% of the total US electricity load, but this could rise to 9% by 2030, on the back of the increasing computing power needed by AI. Irish/American multinational power management company Eaton Corporation says that data centres represent 3% of global energy use (and 2% of greenhouse gases), but by 2027 the world’s data centres will consume roughly treble the amount of electricity. ‘Generative AI’ – think ChatGPT – is itself a 38GW data centre opportunity, according to DigitalBridge CEO Marc Ganzi.
Broking giant Morgan Stanley believes this to be a long-term investment growth opportunity, estimating that data centre demand will grow at a compound average growth rate (CAGR) of about 20% from 2024 to 2027. The data centre build required to meet this growing demand is substantial and there is an accelerated urgency around delivering the infrastructure for the growing global data needs, with AI expected to accelerate this trend.
Australia has four players in the data centre theme, and as readers would expect, investors have already noticed the trend. Let’s take a look at whether there is any value left.
- Goodman Group (GMG, $34.73)
Market capitalisation: $66 billion
12-month total return: 77.1%
3-year total return: 20.9% a year
Forecast FY25 dividend yield: 0.9%, unfranked
Analysts’ consensus price target: $33.00 (Stock Doctor/Refinitiv, 11 analysts)
Goodman Group is an integrated property group with operations throughout Australia, New Zealand, Asia, Europe, the United Kingdom, North America and Brazil. GMG is the largest industrial property group listed on the Australian Securities Exchange (ASX), and one of the largest listed specialist investment managers of industrial and logistics property in the world.
The group’s global logistics clout has been the main reason for its very strong investment performance in the last two decades, but GMG has been developing its data centre capability since 2005. Across North America, Continental Europe/UK, Greater China, Japan and Australia/New Zealand, Goodman has a data centre portfolio of 4.3 GW of potential power (including completed facilities, secured power and potential data centre projects) across 12 major cities, with 40% of that in Europe and 30% in Japan. Data centres now comprise about 40% of the company’s work-in-progress (WIP), or 0.4 GW: with a secured pipeline of 1.3 GW, the future secured pipeline represents three times current WIP levels. Goodman has the opportunity to develop data centres worth up to $80 billion in the coming five to seven years.
The sheer amount of computing power required for new generations of AI technology means multiple data centres will need to be built close together in what Goodman calls AI campuses, which will be much larger than current data centres – running at about 300MW– 400MW power and costing up to $4 billion. Of course, a big requirement to do this is land – and Goodman believes it has the land to make these campuses work.
And in buying into Goodman, you have the rest of the $80.5 billion portfolio working for you as well.
In the short term, analysts believe the stock’s growth has pushed GMG past fair value; but in a recent report on the data centre sector, broker Morgan Stanley nominated GMG as one of the seven best long-term global stocks to participate in the AI adoption wave. On its ‘bull case’ scenario, Morgan Stanley projected Goodman Group shares reaching as high as $45.70, as the company derived $20 billion in additional value from its pipeline of data centre developments.
- NEXTDC (NXT, $17.92)
Market capitalisation: $10.3 billion
12-month total return: 45.1%
3-year total return: 18.9% a year
Forecast FY25 dividend yield: no dividend expected
Analysts’ consensus price target: $19.09 (Stock Doctor/Refinitiv, 16 analysts)
Specialist data centre operator NEXTDC owns 19 data centres around Australia, and one each in Auckland, Kuala Lumpur, and Japan. In April, the company announced $1.32 billion capital raising to fast-track the development and fit out of new facilities in Sydney and Melbourne, to capitalise on record demand for its data storage services. The acceleration in demand has grown NEXTDC’s forward order book to a record 68.8MW. Its contracted utilisation (at the end of 2023) had shot past its actual built capacity of 141MW – hence the need to spend.
NEXTDC plans to develop two new data centres for Sydney, taking its footprint in NSW capital to five facilities, as well as capacity expansion for its S3 data centre in Sydney to 50MW and its M2 data centre in Melbourne to 60MW, in line with contractual commitments to customers.
NEXTDC also anticipates entering the new markets of Tokyo, Singapore and Bangkok in the near-term, as it scales-up to meet the growing demand for high-quality, reliable, and secure data centre services across the region.
Again, it’s a great story – and NEXTDC is also one of Morgan Stanley’s seven best long-term global stocks to participate in the AI adoption wave – but the company is not profitable, as it spends to expand. It’s not expected to deliver profit for at least three years. NEXTDC has reaffirmed its FY24 guidance, of total revenue in the range of $400 million–$415 million – compared to $362.4 million in FY23 – but capital expenditure will consume more than twice the revenue, in the range of $850 million–$900 million.
Then again, analysts do see the shares moving higher, so you might not have missed the data centre wave completely in NEXTDC. For instance, within that analysts’ consensus figure, Morgan Stanley has a ‘bull case’ scenario of $28 for NEXTDC shares; fellow broker Morgans is even more optimistic, saying it could see NEXTDC at $40 by 2031.
- Macquarie Technology Group (MAQ, $87.28)
Market capitalisation: $2.2 billion
12-month total return: 46.6%
3-year total return: 21.1% a year
Forecast FY25 dividend yield: no dividend expected
Analysts’ consensus price target: $90.20 (Stock Doctor/Refinitiv, 16 analysts)
Data centre operator Macquarie Technology Group – the former Macquarie Telecom Group, and nothing to do with Macquarie Group – describes itself as “Australia’s data centre, cloud, cyber security and telecom company for mid-to-large business and government customers.”
The company launched in 1992, initially to take on Telstra as a telecommunications provider, but it grew to become a fully integrated carrier supplying voice, mobile, data networks and managed hosting solutions to business and government customers across Australia and Asia. More recently, the company has grown to offer data centres, cloud and hosting services and cyber-security services. In April 2023, Macquarie Telecom Group changed its name to Macquarie Technology Group, to reflect a decade of strategy transition towards a digital infrastructure business. The company is organised into four businesses: Cloud Services, Data Centres, Government and Telecom.
On the data centre front, Macquarie Technology Group has five data centres in operation, and is currently developing a major data centre campus in Sydney’s north. The company says it has a pipeline for additional growth.
In the FY24 first-half result, the data centre business contributed 11% of revenue, but one-third of EBITDA. Data centre EBITDA grew by 5.3% in the half-year, to $17.2 million. Its projected total IT load was 60MW.
By the full-year result, Macquarie Technology expects the data centre business to be the biggest contributor to EBITDA, generating $34 million–$35 million of the total EBITDA guidance figure of $108 million–$111 million. It will also consume the lion’s share of projected capital spending, $32 million–$38 million of a projected total of $56 million–$65 million.
With Macquarie Technology, of course, investors get the other businesses along with the data centres, including a cloud and government business that also growing robustly. As well, Macquarie Technology is a classic “founder-led” business, with founders David and Adrian Tudehope still owning 43.8% of the equity, ensuring that investors have a very strong alignment with management – David is chief executive officer, and Adrian is managing director of the hosting business. MAQ is one of Australia’s great founder-led businesses.
It has been – and still is – a tremendous story, and there is still plenty of growth available to the company. On balance, analysts see Macquarie Technology as approaching fair value; but Morgan Stanley is the most bullish, with a price target of $100.
- Global Data Centre Group (GDC, $3.04)
Market capitalisation: $235 million
12-month total return: 84.2%
3-year total return: 18.5% a year
Forecast FY25 dividend yield: no dividend expected
Analysts’ consensus price target: $2.37 (Stock Doctor/Refinitiv, one analyst)
Listed in October 2019, Global Data Centre Group operates a portfolio of data centre investments. It invests directly in data centres and associated optical fibre assets, typically taking equity positions of between $20 million and $50 million. Global Data Centre Group’s strategy was to provide investors with medium to long-term capital growth and some income from its data centre portfolio; but after a unitholder vote in July 2023, the strategy shifted, and the fund decided to seek to realise value over the medium term through selling assets – it is unlikely to make any new investments.
This year, GDC has got going on the divestment strategy in earnest. In April, it sold its investment in Fujitsu’s Perth data centre for $39 million, which represented a 2.5% discount to the 31 December 2023 book value of $40 million. Then, in May, it sold its co-controlled investment in European “edge” data centre platform Etix for a net $175 million, a 52% increase on the $115 million carrying value of the Etix investment at 31 December 2023.
GDC’s remaining portfolio is almost wholly based on being part owner (with Macquarie Asset Management, Canada’s Public Sector Pension Investment Board and AirTrunk’s founder and CEO, Robin Khuda) of Asia-Pacific and Japan hyperscale data centre owner AirTrunk (Macquarie Asset Management and Public Sector Pension Investment Board hold a combined 88% stake in the company). Founded in 2015, AirTrunk pioneered hyperscale data centres in the region and today has a growing platform of 11 data centres across seven cities and five markets in Australia, Hong Kong, Singapore, Japan and expanding into Malaysia. With more than 1.4 gigawatts (GW) of total capacity across its portfolio, it is the region’s largest data centre company, outside China. A consortium led by MAM took a controlling interest in 2020, at that time valuing the company at $3 billion.
AirTrunk has been mooted for a sale since last year, with initial public offering (IPO) plans announced in October last year, with Goldman Sachs and Macquarie Capital touted as joint lead managers on the listing. At the time reports valued the business at US$6.4 billion ($10.1 billion). But by early 2024, an IPO was off the cards, and a sale of AirTruck was being talked about in terms of US$7.9 billion ($12 billion). Now, with AirTrunk making more than $600 million in earnings before interest, tax, depreciation and amortisation (EBITDA) last year, earnings that have grown seven-fold since 2020 – and a suite of new client contracts coming through in the near future – the price tag looks to have pushed as high as $15 billion.
This month, the Australian Financial Review reported that some of the world’s biggest investors, including Canada Pension Plan Investment Board (CPPIB), Blackstone and an IFM Investors/DigitalBridge partnership have tabled non-binding indicative offers for AirTrunk, in what amounts to an auction. Although GDC’s stake in AirTrunk is only about 1%, that could be worth more than $150 million to GDC in terms of stake value. However, the market capitalisation has gone well past that – and there would not be much left in GDC after AirTrunk is gone.
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