Data-struction

We’ve seen it twice this year.

Software stocks got hit. Then chip stocks took the second punch.

So are data centres the next in the firing line?

The public backlash is real, and some of it is earned.

Here’s where I stand. The headlines won’t move the share price.

Let me show you exactly why.

The bad news is real

Communities are pushing back on their impact. To water. To power, not to mention the noise and diesel.

A data centre planned for Western Sydney would draw 22.4 million litres of water a year and run 846 diesel generators as back-up.

Penrith City Council objects, with support from the schools next door.

The power grid is an even harder sell.

NSW has a pipeline of 44 datacentres eating 11.4 gigawatts of power.

The grid won’t come close to supplying it. Estimates expect about 1.2 gigwatts to actually reach Sydney by 2030.

Power and water do have their limits. The concern is real.

The other way

But their breathless coverage is leaving out the important details.

Power permits are the real limits on the sector. Whoever holds them already is in a good position.

The biggest name on the ASX, NEXTDC, already has the sites, the power and the approvals. Their power supply is locked in.

Its contracted capacity has reached 667 megawatts, and its orderbook is up 83% over the past quarter. Cloud and AI make up 86% of what’s signed.

A nearly finished $7 billion Sydney facility with OpenAI as its cornerstone tenant is just one example.

So the demand isn’t speculative here; it’s already booked.

Real Risk

The risk is in the balance sheet.

NEXTDC is a builder. And builders eat capital.

This year’s planned spending is $2.7 billion in capex against nearly $400 million of revenue. They are running at a heavy loss.

In fact, NEXTDC isn’t expected to be profitable for years, despite trading at close to 56 times earnings.

Richly-priced. Debt-funded. Years from profit.

That should sound familiar.

No, we haven’t started talking about chips, but I’ll forgive the confusion. This is the exact same profile they were punished for.

If datacentres re-rate lower, it won’t be from lack of demand. It will launch off of high interest rates souring sentiments.

I’ll remind you that software and chips took the hit and stayed in the match.

The Hot Seat

The builder’s seat is a dangerous place; I’ve written about it through June.

They carry the capital and risk violent swings. Secondary companies simply use the finished infrastructure.

A clear shape hasn’t formed for us. News cycle hype or deserved sentiment?

Both.

We see real demand, and the deals are signed. The bad press will thin out newcomers the leaders in the space are established.

The thing to watch is the price you pay; if you’re buying a builder. The risk comes proportional to the upside.

Until next time.