Insights

The NextDC (ASX:NXT) share price is down 3% on Monday

The data centre company’s shares are facing headwinds during Monday’s session.
The post The NextDC (ASX:NXT) share price is down 3% on Monday appeared first on The Motley Fool Australia. –

The NextDC Ltd (ASX: NXT) share price has slipped into the red during Monday’s session and now trades at $13.10 despite there being no market-sensitive information for the company.

That’s a 3.53% drop from the open and a significant lag behind the S&P/ASX 200 Communications Index (XJT) which is 0.7% higher today.

What’s causing this disconnect today? Here we do the digging to find out.

Why is the NextDC share price down today?

There is no market-sensitive news for the data solutions company today. At the same time, the broad indices are each outperforming so it appears something else is at play.

NextDC’s shares have been in a headlock over the past two weeks. Nothing in particular appears to be spurring this on, other than that NextDC’s valuation has been particularly rich lately. Why is this important to know?

Let’s break this down into its simple parts using the example of NextDC’s price-to-sales ratio (P/S), a common financial metric used to value shares.

On 6 September, Next’s share price was $14.04 and was trading on a P/S ratio of 28. It has since come down to a P/S of 26.4. However, its industry median price/sales ratio is 17.27.

As such, NextDC is trading at a valuation around 50% higher than the majority of its competitors, using the P/S ratio as a proxy.

Many investors allocate their capital based on a share’s valuation. How they do this is actually an inverse relationship – they will decrease their position size or sell some individual shares as valuation increases, and vice versa.

Modern financial theory also suggests that shares with high relative valuations are likely to decrease, being “overvalued”. By the same token, shares with lower relative valuations are likely to increase in price due to being “undervalued” from these market effects.

So if investors believe a share’s price is overvalued, it is likely that it will decrease to a more fair price from selling pressures, according to modern financial theory.

What else is up with NextDC shares?

Aside from this, zooming out over the last 6 months, it’s clear to see that the NextDC share price has been on a steady march northwards across this time.

Given a recent shakeup in global share market indices in the last month or so, it could be that investors who have gained a profit in NextDC shares are happy to take their profits and realise cash gains instead.

This is not uncommon activity in the share market, especially when a particular share appears to be overvalued compared to the rest of the market.

In the absence of any market-sensitive information, it appears the sum of all these forces may be placing downward pressure on the NextDC share price.

NextDC share price snapshot

The NextDC share price has had a difficult year to date, climbing 7% since January 1. Over the last 12 months, it’s only been able to gain a little over 5%.

In the last month, NextDC shares have slipped a further 2.4% into the red and almost 5.4% in the past week.

This is well behind the S&P/ASX 200 Index (ASX: XJO)’s return of about 25% over the past year.

The post The NextDC (ASX:NXT) share price is down 3% on Monday appeared first on The Motley Fool Australia.

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More reading

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The author Zach Bristow has no positions in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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