NextDC (ASX: NXT) share price is down 3% on Monday
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The NextDC Ltd The stock price (ASX: NXT) fell in the red during Monday’s session and is now trading at $ 13.10 despite the lack of market sensitive information for the company.
This is a decrease of 3.53% compared to the opening and a significant delay compared to the S & P / ASX 200 communication index (XJT) which is up 0.7% today.
What is causing this disconnection today? Here we dig to find out.
Why is the NextDC share price falling today?
There is no sensitive market news for the data solutions company today. At the same time, the general cues are outperforming everyone, so it looks like something else is at stake.
Shares of NextDC have been blocked for the past two weeks. Nothing in particular seems to be boosting this, other than NextDC’s valuation has been particularly strong lately. Why is this important to know?
Let’s break this down into its simple parts using the example of NextDC price / sale ratio (P / S), a common financial measure used to value stocks.
On September 6, Next’s stock price was $ 14.04 and was trading at a P / S ratio of 28. It has since fallen back to a P / S of 26.4. However, its industry median price-to-sales ratio is 17.27.
As such, NextDC is trading at about 50% higher valuation than the majority of its competitors, using the P / S ratio as a proxy.
Many investors allocate their capital according to the valuation of a share. The way they operate is actually an inverse relationship – they will reduce their position size or sell certain individual stocks as the valuation rises, and vice versa.
Modern financial theory also suggests that stocks with high relative valuations are likely to fall, being “overvalued”. Likewise, stocks with lower relative valuations are likely to rise in price due to being “undervalued” due to these market effects.
So, if investors think a stock’s price is overvalued, it is likely to drop to a fairer price due to selling pressures, according to modern financial theory.
What else is happening with NextDC shares?
Other than that, zooming out over the past 6 months, it’s clear that the NextDC share price has been steadily moving north during this time.
Considering a recent upheaval in global stock indices over the past month or so, it could be that investors who made a profit on NextDC shares would be happy to take their profits and earn cash instead.
This is not an uncommon activity in the stock market, especially when a particular stock appears to be overvalued relative to the rest of the market.
In the absence of any market sensitive information, it appears that the sum of all of these forces could put downward pressure on the NextDC share price.
NextDC Share Price Snapshot
The NextDC share price has had a difficult year so far, climbing 7% since January 1. In the last 12 months, he has only been able to gain a little over 5%.
Over the past month, NextDC shares have slipped a further 2.4% into the red and nearly 5.4% last week.
It’s well late on S & P / ASX 200 Index (ASX: XJO) by about 25% over the past year.