Australia’s Digital Infrastructure Opportunity

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Australia’s safe and stable backdrop makes it a target for data centre development in the Asia Pacific region, as the positive news keeps rolling on.

-Good news continues to flow for data centre infrastructure 
-Hyperscalers continue to invest for AI growth
-NextDC, Goodman Group & DigiCo REIT in focus

By Danielle Ecuyer

The GenAI trade is back, after a wobble at the start of 2025

“The reports of my death are greatly exaggerated.” 
(attributed to Mark Twain).

Today’s opening statement might as well be applied to the GenAI trade and ancillary beneficiaries such as data centres and digital infrastructure.

Wilsons is the latest researcher to shine a light on the mega trend of “Gen(erational) AI thematics” with a very playful title.

In addressing the sell-off in AI-related stocks during the first quarter of 2025, Wilsons echoes similar views to other commentators and experts the arrival of DeepSeek will not alter the AI demand for data centres over the longer term. Equally, Microsoft’s decision to cancel 2GW of data centre projects relates in large part to the shifting dynamics of the company’s relationship with OpenAI.

While Microsoft’s OpenAI requirements were lowered, hence the cancellations, Oracle’s rose as the work was transferred to other hyperscalers.

The most recent US earnings season also re-inforced the investment plans for hyperscalers with Microsoft confirming capex of over -US$80bn, Alphabet at -US$75bn, and Amazon at -US$100bn with Meta lifting capex guidance to -US$64bn-US$72bn from -US$60bn-US$65bn underpinned by data centre spending.

These issues were also detailed in FNArena’s recent update on data centres: https://fnarena.com/index.php/2025/06/19/fnarena-visits-nextdcs-s3-data-centre/

Driving demand Downunder

Three drivers are underpinning demand for digital infrastructure, such as data centres, notably the ongoing shift to cloud computing, the ongoing development and acceleration in GenAI, and the expanding rise in data generation which includes the Internet-of-Things (IoT), Software-as-a-Service (SaaS) adoption, edge computing for the likes of autonomous vehicles, and video streaming.

At Morgan Stanley’s 7th Australian Investment Summit, one of the key themes for attendees and participants was AI Tech Diffusion. The broker emphasised Australia is continuing to experience “exponential growth in data centre demand”.

By way of context, Australia ranks seventh globally in terms of the number of data centres, behind global leaders the US, Germany, the UK and China, and only just behind Canada and France, with more than 300 data centres at the start of 2024. The Netherlands, Russia and Japan complete the global top ten.

Sydney is recognised as a Tier One global Top 10 Data Centre Market. According to industry research, the market is expected to reach US$8.58bn by 2030 from US$6.81bn in 2024, a compound average annual growth rate of almost 4%.

Australia is viewed as a safe and stable data hub in the Asia Pacific region, with over 2,300MW of new projects announced in 2024.

E&P’s (formerly known as Evans and Partners) latest report on AI emphasises the ongoing positive tailwinds for data centre demand in Australia, while downplaying the negative narratives circulating around hyperscalers cutting back on investment earlier in 2025.

Microsoft is reportedly pausing data centre leasing as it works through the next stages of power density for training arrays (GPUs and the like for training large-scale AI models), which is due in 2027. Capex guidance from the company indicates, as highlighted above, ongoing spending, albeit with some projects deferred, not canceled.

Equally, concerns over Amazon’s AWS cutting back have also proved misguided.

If one were doubting the deployment of AI, Morgan Stanley’s technology, media and telecommunications analyst hosted several panels at the conference which concluded GenAI should facilitate a broader “diffusion” of Tech and fast AI adoption, which is referred to as the democratisation of AI technology, which should speed up the rate of product innovation and use by enterprises.

The health sector was singled out as one example for AI being employed. Health insurance is one area where nib Group ((NHF)) is applying AI to increase member engagement and employee productivity. The insurer pointed to its AI-powered chatbot which had dealt with over 4m interactions and has achieved $22m in productivity savings since 2021.

AI is also being used for improving radiologist productivity and reporting accuracy, while drug development can be enhanced.

Amazon, via Amazon Web Services (AWS), announced last week in joint venture statement with Prime Minister Albanese it continues to envisage robust growth in demand for AI and cloud-based services in Australia.

AWS has increased its investment commitment to -$20bn from -$13bn over 2025-2029 for data centres, with a corresponding investment in three new renewable energy projects at 170MW in Victoria and Queensland in partnership with European energy.

Citi explains AWS operates three data centres in Sydney, Melbourne and Perth, with the $20bn aimed at developing additional capacity in Sydney and Melbourne.

Noting the recent pause in new contracts from Microsoft, the AWS news is viewed optimistically as further commitment to growing Australia’s data centre industry.

Goodman Group ((GMG)) is considered a potential developer of those centres and thus a potential beneficiary. More on Goodman soon.

How AI underpins higher earnings for data centres

The E&P analysis details several reasons to be upbeat on AI infrastructure-related stocks, including the scale of investment both globally and in terms of what is coming to Australia, while AI-related data centre deals are more profitable than cloud ones, which should underscore more profitable returns for the sector.

Breaking down the difference between cloud-related versus AI-related demand, E&P explains in the first instance a hyperscaler estimates future cloud-computing deployment, and then the cadence at which the compute is installed depends on demand sequencing.

NextDC’s ((NXT)) recent contract announcements are an ideal present day reference:

On May 12 NextDC reported an increase in contracted utilisation by 52MW, stating the ramp as “revenue for the majority of the new customer contract wins is expected to be progressively recognised from FY24 through to FY29, following completion and commissioning of additional data halls over time.”

Compare this to the announcement on May 6, 2025, for a contracted utilisation increase of 35.9MW with a stated quote on ramp: “revenue for the majority of the new customer contract wins is expected to commence in FY27 following completion and commission of additional data halls. The full run rate associated with these customer contract wins will be realised from FY28 onwards”.

The most recent contract, which was identified as an AI contract, starts generating revenue in the second year at a full run rate, versus the prior cloud-based deal which takes over five years to ramp into less committed capacity.

The shift towards more AI-related contracts via a supercomputer which must be entirely built before it is usable, has positive financial implications of generating at a full run rate once installed versus a staggered rate. E&P believes the difference on data centres’ financial metrics for the two usages cases are yet to be fully understood and appreciated by the market.

Equally, the shorter lead time to full revenue recognition for AI-related contracts means data centre operators can employ greater debt financing to fund AI deals against cloud deals, due to a reduced time frame for the non-income-generating phase.

From an investor perspective, the recognition of income from a cloud contract often creates confusion. The progressive income recognition of a large contract equates to being loss-making to start, resulting in lower near-term earnings but with a higher valuation (higher growth in the longer term). 

Highlighting the demand profile for data centres in Australia, E&P observes Microsoft has taken a step back from being the biggest after representing some 70% of demand in 2023-2024, but the company is expected to return down the track.

Meanwhile, Amazon’s AWS has increased its investment, while Google, Oracle, Apple, and Meta are all noted for being in the market. Chinese hyperscalers like Alibaba and Tencent are also reported as seeking out capacity in Australia.

Data centre stocks in focus

NextDC attended the Morgan Stanley conference and highlighted recent contract wins with UBS detailing how the company received its largest contract win to date at 52MW in 2H25, followed by an additional 16MW, which lifted FY25 to a record additional 72MW contracted.

By way of comparison, NextDC’s S3 data centre has 80MW of capacity.

For more details, see https://fnarena.com/index.php/2025/06/19/fnarena-visits-nextdcs-s3-data-centre/

Notably, 10MW of the latest 16MW contract related to Kuala Lumpur for a hyperscale customer, which is viewed as an important strategic step in de-risking the project at around 15% of the capacity, and the first major offshore contract announced. Morgans noted KL1 is due to go live in 2026.

As at the end of May, NextDC had 244MW contracted with a proforma order book reaching a record 135MW, which implies 109MW has been activated to date.

Wilsons explains NextDC has 13 operational data centres with five in development and around 1.3GW of planned capacity.

For E&P, NextDC is Australia’s top stock pick for data centre exposure and across the broader ASX-technology sector. The analyst believes the current share price does not reflect the good news from the company this year, and particularly its near term prospects for more contracts in Melbourne, post the 50MW-plus announcement and the Kuala Lumpur 10MW deal. 

A valuation of $28.36 is set with a Positive rating.

FNArena daily monitored brokers have a consensus target price of $19.567 with six Buy-equivalent ratings.

Wilsons and Canaccord Genuity are also Buy-equivalent rated, with respective target prices of $17.69 and $20.15.

Wilsons’ preferred data centre exposure is Goodman Group, with a 4% weighting in the broker’s model portfolio, leading to an Overweight allocation to digital infrastructure.

Goodman has delivered 500MW of built capacity and has a 5GW power bank, with 500MW (10% of the power bank) due to commence over the next 12 months. The power bank can support $100bn of data centre developments over the next ten years through a combination of equity sell-downs and employing existing liquidity.

FNArena daily monitored brokers have a consensus target price of $36.168, with Citi at the upper end of the range at $40. There are five Buy-equivalent ratings and one Hold. Jarden has a Buy rating and $39 target price.

Wilsons points to DigiCo Infrastructure REIT ((DGT)) as an emerging global data centre developer, which was listed in December 2024. The REIT has a circa $4bn portfolio of 13 assets equaling 76MW of installed capacity and a 162MW development pipeline.

Although the REIT’s share price performance has been “disappointing” since listing, Wilsons believes it is in a good position to generate growing cash flows and distributions over the long term.

With 40%-50% of the portfolio across three data centres generating revenue with average contracted rental increases of 3%, in combination with 15-year leases and high contracted utilisation, the REIT is seen offering a stable stream of rental growth.

Leasing opportunities exist for around 9MW or 12% of DigiCo’s total built capacity, with SYD1 (Sydney) underused at 76% and capacity to expand to 62MW, which can be phased in over five years with a targeted 12% yield.

There are also greenfield development capacity options with two sites in Los Angeles (LAX1 and LAX2), with combined expected capacity of 72MW. LAX1 is anticipated to start construction in 2H25 with completion in 2028.

Wilsons explains SYD1 is seeking Hosting Certification Framework (HCF), a specific security clearance the asset didn’t formerly have due to its Chinese ownership, which is due for approval mid-2025.

DigiCo is also seeking out capital partners for SYD1 once the asset is de-risked to allow for a partial sell-down to free up capital for growth.

E&P also has a Positive rating for DigiCo with a $4.56 valuation with the Global Switch and LAX1 processes progressing, and with upside for Sydney post the HCF certification.

Three FNArena daily monitored brokers cover the stock with three Buy-equivalent ratings and a consensus target price of $5.343.

Macquarie Technology also enjoys a Positive rating with a $110.18 valuation.

Check out the latest on Macquarie Technology Group ((MAQ)): https://fnarena.com/index.php/2025/06/18/rudis-view-macquarie-technology-stock-in-focus/

The author owns NextDC and Goodman Group shares in her SMSF.

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