Selling Pressure Mounting For NextDC

This story features NEXTDC LIMITED. For more info SHARE ANALYSIS: NXT

Bottom Line: 04/09/18

Daily Trend: Down
Weekly Trend: Down
Monthly Trend: neutral
Support levels: $6.25 – $6.18 / $4.81 – $4.76
Resistance levels: $8.19

Technical Discussion

NEXTDC ((NXT)) is an independent data center operator with strategic footprint in all major growth markets in Australia. The company is the leading independent operator providing Tier III facilities, enterprise class colocation services and has a broad range of domestic and international clients. It's Cloud Centre hosts the country's largest network of carriers, cloud and IT service providers allowing clients to have integrated cloud deployments. For the year ending the 30th of June 2018 revenues increased 31% to A$161.5M. Net income decreased 71% to A$6.6M. Revenues highlight the operating NSW section increase of 37% to A$56.2M and the Vic section increase of 25% to A$64.3M. Net income was offset by Depreciation and amortisation expenses which increased 42% to A$33M. Broker consensus is “buy”. No dividend is paid.

Reasons to bullish longer term (downside risk medium term):
→ Pricing discipline is robust.
→ Structural tailwinds in the industry remain.
→ FY19 Guidance reflects an exceptional year.
→ The relationship with Amazon Web services continues to grow.
→ Cloud users indicate continued momentum for data creation and storage requirements.
→ Revenue pipeline is stronger than ever with several Hyperscale cloud deals looking to be closed.
→ The Australian data market expected to double by 2021.
→ Well positioned to profit from growing demand for data center capacity due to exponential Internet growth.

On the face of it, results presented at the end of August were strong although brokers and analysts have concerns. The problem is that no major customers have been found during the second half of FY18 which can mean one of two things. Either tenders are still alive or they have been won elsewhere. If it’s the latter, then a major stumbling block is in place. Time will tell. One thing is for sure though, this likely explains the initial gap higher following results a few days ago which was followed by intraday weakness and a close near the lows of the session. Weakness has continued over the past couple of days. As far as the technical picture is concerned nothing changes. We were looking for short-term strength to take price into the target area from where another leg lower was anticipated.

In that regard we couldn’t have asked for anything more with the patterns remaining firmly on track. The question now is how deep the current retracement is going to travel. The wave equality projection is sitting slightly beneath current levels which could provide a reprieve although at this stage we are looking for a bounce higher only from those lower levels. If our larger degree wave count is correct then a completed 5-wave move from the lows made in late 2016 is locked in. This opens the door for a continuation beneath the wave equality projection and down toward the 50% – 61.8% retracement zone as shown which is still a hefty percentage decline from current levels.

It’s also likely going to take several months for such a pattern to unfold. Should downside momentum continue immediately, with price hitting our target area sooner rather than later we’ll have to reassess, as from a time perspective the retracement won’t show symmetry.

Trading Strategy

On the weekly chart (not shown) bearish divergence is still evident although our oscillator is now within a whisker of tagging the oversold position meaning it shouldn’t be a headwind for too much longer. This could coincide with our expectations of a bounce over the coming weeks although as already mentioned that’s all we’ll be looking for – a rally only and nothing more. Any lacklustre bounce over the coming weeks would offer a shorting opportunity if you are that way inclined although it’s an aggressive strategy in the current market environment. For now, we prefer to be looking for buying opportunities.

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not by association FNArena's (see our disclaimer).

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