Rudi’s View: Macquarie Technology (Stock In Focus)

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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

In Weekly Insights this week:

-Macquarie Technology’s Integrated Data Centre Services
-FNArena Talks

By Rudi Filapek-Vandyck, Editor

Small cap stocks in the US are on their worst performance relative to large-cap stocks in over twenty years with the Russell2000 index only up 24% since the beginning of 2020.

The gap with the 60% in gains achieved by the S&P500 over that period is nothing short of enormous and will have caught many investors by surprise.

There are always exceptions, of course, but the underlying trend in Australia has been similar with share market momentum in particular favouring large cap banks, technology stalwarts and AI-beneficiaries.

The FNArena-Vested Equities All-Weather Model Portfolio has benefited through the likes of Wesfarmers ((WES)), Goodman Group ((GMG)), and TechnologyOne ((TNE)), among others, but also included are some smaller cap companies that have not been able to keep up.

Time to highlight one of recent Portfolio additions that might require some patience, and why this company was chosen in the first place.

Macquarie Technology’s Integrated Data Centre Services

My first contact with what was then still called Macquarie Telecom was about twenty-five years ago. That infamous Nasdaq meltdown was still in full swing.

The then small-cap challenger telco had just issued a profit warning and my attempts to get hold of someone –anyone– for a follow-up conversation over the phone amounted to nothing.

Clearly, there was no appetite to talk to the press given the market update was a negative for the share price.

A while later I received an invitation for an in-person visit to the company’s data centre in the heart of Sydney’s CBD.

Under the stewardship of two founding Tudehope brothers, Macquarie Telecom, now Macquarie Technology, has always had an integrated approach focused on achieving the highest rates of customer satisfaction possible. One might argue it’s a feature that sticks with higher quality companies.

Something many investors in small cap companies very much like: both founders have been CEO and MD of the company since 1992.

Those investors that remained loyal to the company have enjoyed significant rewards, but equally important; this company has changed dramatically since then, and shareholders had to wait until 2014 before positive momentum got hold of the share price in a sustainable manner.

The business itself has changed dramatically. What was back then its main purpose of existence, and of corporate survival –telco services– has become but a side-show today.

At its core, the integrated customer servicing approach has remained, and it is what makes this company fundamentally different from more glamorous data centres and AI exposures on the ASX, including Goodman Group, NextDC ((NXT)) and Megaport ((MP1)).

Today, Macquarie Technology sees itself as a diversified Australian digital infrastructure services provider operating across four inter-related segments: Data Centres, Cloud Services, Cybersecurity (Government), and Telecom. Its specific areas of focus are the Australian government and mid-to-small cap businesses across the country.

Similar as with Goodman Group, which also didn’t start off as a dedicated builder of data centres for international clients, data centres have become the main focus for investors, and are now responsible for the future outlook and investment returns for the company.

Macquarie Technology currently has five Intellicentre facilities (three in Sydney and two in Canberra) with high security and certifications for government use.

The company’s strategy revolves around integration of its own data centers to offer secure cloud and hosting solutions, with 42% of Australian Federal Government agencies using its services (hence the relatively strong Canberra footprint).

The Government division works with defense and intelligence agencies under high-security clearances and remains responsible for more than 50% of total revenues and some 46% of group earnings (EBITDA).

Similar as is the case for a high quality performer such as TechnologyOne ((TNE)), a high customer retention provides Macquarie Technology with opportunities for additional sales and services. Maybe this has provided the backbone for what has been a remarkable reliability and consistency in growth and profitability in recent years.

FY24 marked the company’s tenth year of consecutive improvement in EBITDA. The first half of FY25, reported in February, marked its 20th straight half-year of EBITDA growth.

At the same time, this still is a relatively small-sized enterprise with a market cap of circa $1.6bn, annual sales of no more than $363m and FY24 earnings of $109m. Building additional data centres comes with a high cost. Capital expenditure reached almost 50% of total sales in FY21 and 40% of sales in FY24.

One added advantage is the telecom unit is a reliable generator of free cash flows which assist with carrying the burden of significant investments.

Uncharacteristically, for a small-sized company in significant expansion mode, Macquarie Technology carries almost negligible debt, also due to an $100m equity raising in 2024.

Substantial investments made should allow the company to command its share from ongoing strong demand for data centre capacity, cloud computing and cybersecurity.

In the same vein, with a relatively small built and in-progress capacity, the company’s service offering is not genuine competition for much larger industry players such as Amazon’s AWS or NextDC; Macquarie Technology operates inside its own specialised niche, where the One-Stop-Shop concept has its advantages.

The current crown jewel in the company’s growth plan is the IC3 Super West extension of its campus in Sydney’s Macquarie Park where capacity will increase by some 200%, but this will still only take total campus capacity to 63MW. In comparison: NextDC is preparing for data centres with a capacity of up to 550MW.

Whereas Macquarie Technology has guided towards $162m-181m in capex for FY25, NextDC could potentially be spending $2bn.

In practical terms, all of the above means the associated risk profile is more benign, in particular when compared against more aggressive investment profiles across the industry, but future rewards will also come in a more measured manner as the company scales capacity in line with customer wins and demands.

Nevertheless, the next 2-3 years should become a lot busier with projects being finalised, and new ones started, with new customers joining and more contracts signed. Assuming execution does not encounter any unforeseen disasters, a platform should emerge for significant earnings growth.

The most important factor to add here is that none of those prospects seem to be priced-in currently.

Previously, when market momentum was chasing the AI and related data centres narrative, the share price had risen as high as almost $100 per share, which left almost no room for time, execution or risks, but now that market sentiment has deflated and turned more skeptical, that share price is arguably not priced for what logically lays ahead.

Out of FNArena’s daily monitored brokers, only Morgan Stanley offers active coverage but its valuation for the data centres portfolio amounts to circa $50 per share whereas the total business currently trades at $62.

Others who cover the company tend to also have a positive assessment, agreeing with Morgan Stanley’s call for significant undervaluation.

Stock Analysis on the website also includes assessments by Petra Capital, Canaccord Genuity and Wilsons.

Potentially even more important is management is currently mulling over the options available for its data centres portfolio, including joining up with financial partners and creating a separate business. One would have to assume that whatever will be decided is meant to unlock more value for shareholders.

With the structural and reformative thesis of AI intact, the All-Weather Model Portfolio recently included Macquarie Technology in addition to its exposure through Goodman Group, NextDC, and Dicker Data ((DDR)).

Investor appetite for small caps whose share price is not supported by positive momentum is currently not great, and the coming two weeks might see tax loss selling impacting on shares that have no clear direction, such as Macquarie Technology’s.

But put it all together, including ongoing strong market dynamics for data centres capacity, cloud computing and cybersecurity, and the thesis remains that the balance of risks for today’s shares in Macquarie Technology is to the upside, in particular if we allow time for events to play out, as is our intention.

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Long before its portfolio inclusion, Macquarie Technology had been included in my curated list for Emerging New Business Models on the dedicated section for my research into All-Weather Performers.

This section is accessible 24/7 to paying subscribers: https://fnarena.com/index.php/analysis-data/all-weather-stocks/

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More reading on AI and its importance for the years ahead:

https://fnarena.com/index.php/2025/06/11/rudis-view-the-ai-promise-is-broadening/

https://fnarena.com/index.php/2025/05/28/rudis-view-how-do-we-value-the-future/

FNArena Talks

Last week, Livewire Markets published a profile of myself in their Meet The Investor series.

The profile can be viewed here:

https://www.livewiremarkets.com/wires/the-gfc-nearly-crushed-him-literally-now-rudi-s-hunting-stocks-built-to-last

For those who prefer a PDF version:

https://www.fnarena.com/index.php/download-article/?n=A320A107-D95F-67B9-D3F4A54B463C7EF7

Model Portfolios, Best Buys & Conviction Calls

This section appears from now on every Thursday morning in a separate update on the website. See Rudi’s Views for the archive going back to 2006 (not a typo).

FNArena Subscription

A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (21 since 2006); examples below.

(This story was written on Monday, 16th June 2025. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena’s see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: contact us via the direct messaging system on the website).

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