Microsoft data centre development outlook is good news for local player

Tech giant Microsoft has reconfirmed its $128bn AI-fuelled data centre development pipeline remains on track, with Citi analysts saying any delay in Australia will likely be temporary – which is a positive sign for ASX-listed NextDC.

Investor concerns that the next set of Microsoft contracts had been pushed back had been weighing on the Australian data centre developer and operator.

“While we have not been able to confirm that contracts have been delayed, even if it were to be true, we see this as likely temporary especially given Microsoft’s capex plans,” Citi analyst Siraj Ahmed said.

It comes after Microsoft’s vice-chair Brad Smith mentioned in a blog post on Friday the company was on track to spend $US80bn ($128bn) to build out AI-enabled data centres in its fiscal year ending June, which would represent a 40 per cent year-on-year increase.

“While the $80bn figure is in line with VA consensus forecast of about $US84bn and is essentially the annualisation of the $US20bn that was spent in 1Q, the blog post highlights that there is no slowdown in Microsoft’s AI-fuelled data centre development plans in the near term,” Mr Ahmed said.

He said this was especially of interest in the context of recent concerns of large language models hitting the limits of scaling laws for pre-training, which Citi does not see as a big driver of data centre development in Australia.

Mr Ahmed said new AI reasoning models depended on inference-time scaling, which in his opinion is a bigger driver of data centre demand in Australia.

“While the initial focus and the current debate has been on the benefit of scaling pre-training in developing better AI models, we see scaling of inference as an additional driver of data centre capacity, and arguably a bigger driver of data centre capacity in Australia as well as broader Asia, as we do not expect pre-training workloads to be larger driver of data centre capacity in the region,” he said.

Citi has a buy rating on NextDC and $20 price target, with the stock closing down 2c at $15.10 on Monday. [Ed: update – at the time of publishing this article to Stockhead on Thursday Jan 9, NXT is trading at $15.36.]

UBS analysts also have a buy recommendation and last month lifted the price target by 3.1 per cent to $20, noting that the risks around delivery of NextDC’s S5 data centre in Sydney had reduced with the latest land rezoning report by the NSW government.

UBS analysts believe the planned S5 Sydney centre will be assessed under old zoning rules, rather than under new rules that prohibit further data-centre development in the relevant zone.

They wrote in a note to clients that while the data centre had not been approved, the absence of a clear block is positive for its chances of approval.

NextDC chief executive Craig Scroggie told shareholders at November’s annual general meeting that the local AI market was projected to grow to about $4.8bn this year and would continue to grow at a compound annual growth rate of nearly 29 per cent through to 2030.

This article first appeared in The Australian.