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Is NEXTDC's (ASX:NXT) 295% Share Price Increase Well Justified?

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·3 min read
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When you buy a stock there is always a possibility that it could drop 100%. But when you pick a company that is really flourishing, you can make more than 100%. One great example is NEXTDC Limited (ASX:NXT) which saw its share price drive 295% higher over five years. On top of that, the share price is up 22% in about a quarter.

See our latest analysis for NEXTDC

Given that NEXTDC didn't make a profit in the last twelve months, we'll focus on revenue growth to form a quick view of its business development. When a company doesn't make profits, we'd generally expect to see good revenue growth. Some companies are willing to postpone profitability to grow revenue faster, but in that case one does expect good top-line growth.

For the last half decade, NEXTDC can boast revenue growth at a rate of 24% per year. Even measured against other revenue-focussed companies, that's a good result. So it's not entirely surprising that the share price reflected this performance by increasing at a rate of 32% per year, in that time. So it seems likely that buyers have paid attention to the strong revenue growth. To our minds that makes NEXTDC worth investigating - it may have its best days ahead.

The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).

ASX:NXT Income Statement May 12th 2020
ASX:NXT Income Statement May 12th 2020

NEXTDC is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. If you are thinking of buying or selling NEXTDC stock, you should check out this free report showing analyst consensus estimates for future profits.

What about the Total Shareholder Return (TSR)?

We've already covered NEXTDC's share price action, but we should also mention its total shareholder return (TSR). Arguably the TSR is a more complete return calculation because it accounts for the value of dividends (as if they were reinvested), along with the hypothetical value of any discounted capital that have been offered to shareholders. NEXTDC hasn't been paying dividends, but its TSR of 306% exceeds its share price return of 295%, implying it has either spun-off a business, or raised capital at a discount; thereby providing additional value to shareholders.

A Different Perspective

It's nice to see that NEXTDC shareholders have received a total shareholder return of 50% over the last year. That's better than the annualised return of 32% over half a decade, implying that the company is doing better recently. In the best case scenario, this may hint at some real business momentum, implying that now could be a great time to delve deeper. It's always interesting to track share price performance over the longer term. But to understand NEXTDC better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with NEXTDC , and understanding them should be part of your investment process.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on AU exchanges.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.