NEXTDC Limited

ASX:NXT

NEXTDC Limited

ASX:NXT
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$15.47 (+0.3%)
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#115
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Forum Topics NXT NXT Capital Intensity

Pinned straw:
Mujo
Last edited 2 years ago

I don't follow data centres closely as I was always worried about technologic absolesence (Moore's Law) making it a very capital intensive business with the long term economics unclear especially given the commodity nature of the industrie and the hyperscaler opposition. I am by no means an expert and this is probably a very uninformed viewe, especially with smart investors like Gurav often citing how excellent these businesses are including Macquarie Telecom and Infratil.

I had not thought of privacy also being an issue - but this article is interesting in discussing this. The quote of replacing every 3 - 5 years if true (and I'm not sure on cost) seems like a rather short payback and profit period. - Why Big Tech shreds millions of storage devices it could reuse | Financial Times (ft.com)

Key quotes below:

Data centres usually upgrade their servers every three to five years, meaning most of the 11mn that were produced globally in 2017 will be decommissioned this year. 

 Although most data centre companies discard their storage devices after a few years, they could last for years — or even decades — longer, according to several industry experts. 

 “Clients are so worried about disposal of data that they’re insisting on the hard drives being destroyed,” says Michael Winterson of global data centre provider Equinix.

 Some of the major cloud computing providers have been taking steps towards reuse. Google says 27 per cent of the components it used in server upgrades in 2021 were refurbished inventory and that it overwrites data on its hard drives for reuse where possible. Microsoft now operates several circular centres” for refurbishing old servers and says more than 80 per cent of its decommissioned assets will be repurposed by 2024. But for hard drives, specifically, shredding is still the norm.
Mujo
Added a month ago

Reading more and more about short lifespans like below (from a data centre fund manager). A lot of hype but not sure the economics are proven yet:

  • The key risk, of course, is contract renewal at year 10.

...

  • Same-store revenue growth has been flat for the past decade. This is because renewal risk has historically not worked out favorably, with pricing down and vacancy up. There are three main drivers of this:
  • o As companies like Google, Microsoft, and Amazon have come to dominate hyperscaler tenancy, they have driven rental rates down simply because they are sophisticated and have strong bargaining power.
  • o For the likes of Google, Microsoft, and Amazon, interest rates feed directly into rental rates because of the open book cost of capital methodology they employ in rental negotiations. Consequently, historically declining interest rates were a factor in pushing down rent. Conversely, recent interest rate increases have been a factor in driving rents higher.
  • o Older facilities face an increasing degree of obsolescence as power density requirements increase significantly with improvements in computer server technology.
  • With higher interest rates and inflation pushing up build costs, hyperscaler pricing is up 4% year-to-date. If this trend becomes the new norm (more likely it is temporary), project level economics would not be materially different from those presented in our case above.

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Solvetheriddle
Added a month ago

@Mujo im no expert as well, but the rate of tech advancement must cause some concern. i have read that older DC's cant accommodate or be upgraded for heavy duty AI service, that means they do the less exciting stuff and be commoditised, or redundant? I own GOOGL MSFT and AMZN, although they are not cheap they are cheaper than some of the DC owners, as dome instos pay up to own some exposure. as retail punters we have the flexibility to own the organ grinder instead, why not?

15
Mujo
Added a month ago

Yes i think the technology advancement means they will always be behind - as long as chips keep improving.

The prices of a capital intensive REIT just because it’s a a data centre is ridiculous. Every australian fund manager buying goodman group just because it’s the right theme is also idiotic at these levels.

I looked at NXT over the last 5 years, and yes they’re still building it out, but the share counts growth is the same as the revenue growth pa.

If we don’t have the exposure on the ASX no point trying to make some quasi look a like thing just because it’s the fad.

12
SudMav
Added a month ago

thanks @Mujo@Solvetheriddle. You have penned what I have been thinking for quite a while about Data Centres. They are a very capital intense business operating in a field where technological advancements are progressing fast. I read an article from JLL where they said that the data centres can be upgraded with strategic planning, but likened the process to keyhole surgery and probably wont have the full utility as any new builds.

If we look into the future 5-10 years, what happens to the buildings if they reach functional obsolescence? Will they still be able to be upgraded cheaply to continue as a data centre, be used for something similar without significant costs, or will they be like C/D grade office buildings where owners have to refurb and offer incentives to attract tenants to the site.

I'm more than happy to sit on the sidelines for now, and wait to see how this all pans out.

10