Cloud Wars
The internet cloud seems a lot less sexy when you realise that all it consists of is a bunch of servers in a warehouse, known as a “data centre”, which spews out carbon like there is no tomorrow.

There was evidence this week, however, that many might not see it like this. NextDC (ASX: NXT) announced it had successfully raised $50 million at $1.75 a share to gain first mover advantage in the provision of these “data-centres” in Melbourne and Canberra. Its shares are now trading at $1.84 and its market cap is $174 million.

The placement was fully underwritten by brokers RBS Morgans and Moelis Australia (which means they’ll get the funds) but it’s notable that it represents almost 25 per cent of the issued capital.

This is a big risk for investors in a company that is not forecast to make a profit until the financial year 2014 (if then), by RBS Morgans’ analyst Nick Harris.

Each NextDC data centre is of the “co-located” variety, which means that it is simply a bunch of servers all bundled together into one warehouse. Pretty commoditised stuff.

It’s even more commoditised when you think that technology giants like Google, Microsoft and Apple are all putting their considerable muscle into building data centres around the world.

Harris values the stock at $2.01 by discounting its future cash flow forecasts. His big bull points include that it has “an independent national footprint” and “it is well funded”.

You can’t argue with either of those points, but one fundie summed up the group’s problem when he said that his company is paying $200 a year for back up from a US cloud, while such options in Australia cost $1300 a month.

Another cloud player – the other Macquarie

Elsewhere in the cloud we see more hope for investors in Macquarie Telecom – another data centre company, but one which has positive earnings growth and delivers a dividend, to boot.

This company has been in the telco space since the early 90s, first as a reseller, and then in the aftermath of the tech-wreck in 2000 moving into data centres, or hosting. Macquarie bought a data centre near Sydney’s Central Station, and is busy building another in Sydney’s Macquarie Park for about $60 million.

Unlike Next DC, which is solely an infrastructure provider, Macquarie gives customers what it calls “managed services”.

Next DC provides the space to house its clients’ servers. Macquarie does this, but also looks after its clients’ IT needs. This extends to “business critical” services.  According to founder Aidan Tudehope, about 20 per cent of its revenues come from hosting IT services for government departments. Organisations like ASIC and ASIO rely on Macquarie to ensure that their IT systems are operational at all times.

Its hosting business has increased revenues something like 30 per cent a year since its commencement. And being a predominantly fixed cost business, its revenue growth is magnified on the bottom line. It has increased EPS by 40 per cent between fiscal 2009 and 2010 and Bell Potter forecasts it to climb a further 60 per cent in fiscal 2011 to 80.5 cents, and then grow at more than 20 per cent a year over the next two financial years.

At $10.69 a share, this puts the company on a PE of just over 13 times. Bell Potter’s $13 price target is based on the 20 per cent discount that it trades to its telco peers.

In the IT world, the cloud is definitely more than vapour, and companies like Macquarie Telecom are trying to prove that it is also more than a bunch of servers in a warehouse.

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