ASX data centre stocks an oasis in the midterm bloodbath

US data centre developers have been hammered by the Democrats' midterm sweep. Their ASX-listed counterparts – Goodman, NextDC, Macquarie Technology Group and Centuria – have been spared, and then some.

Markets were expecting the Democrats to win. What they weren't expecting was the margin and scope of the victory, which means it wasn't fully priced in.

The result is extreme volatility in data centre stocks on both sides of the Pacific. These businesses are deeply sensitive to permitting, planning approvals and tax breaks, and the outlook for all three has just shifted.

For long-term investors, the upshot is that US data centre developers now have almost no good news in the price.

US data centre stocks have split in two

Post-midterms, American data centre stocks have mostly either collapsed or surged, with little in the middle.

Owners of established, operating capacity have rallied. Equinix rose 4%, Digital Realty 3%, Alphabet 3% and Amazon 6% overnight. The market expects incumbents to enjoy a scarcity premium as supply growth slows. It's also significantly easier to get regulatory sign-off to expand an existing data centre than to permit a new one.

By contrast, anything associated with future builds has fallen, and the falls correlate with how exposed each company is to permitting-contingent projects. That includes the obvious culprits like CoreWeave and the other neoclouds, but also construction, cooling and adjacent businesses such as Modine and Comfort Systems.

Why the builders are cratering

The market expects the Democratic wins to have significant long-term implications for data centre development.

Democrats have won governorships in Texas, Ohio, Nevada, Georgia, Michigan and Pennsylvania, and look likely to take Arizona as well. They campaigned for tougher data centre regulation in each of these states, which together account for 45% of planned US data centre capacity. Texas alone accounts for 25%.

The market fully expects these results to trigger slower approvals, more selective vetting and potentially the repeal of local government tax breaks.

Even if they don't, the uncertainty itself is enough to move the needle. When markets are less certain about your growth prospects, they discount you more heavily – especially if you're loss-making in a high and rising interest rate environment.

That's exactly what's showing up in valuations. Overnight, CoreWeave fell 9.5%, Applied Digital 8.8%, Nebius almost 7% and IREN around 11%, while Cipher Digital slid 21%. For CoreWeave it compounds a brutal stretch: the stock is down roughly 46% in a month after debt worries pushed its bond yields above 15%, and its credit default swap spreads widened again after the result.

ASX data centre stocks rally

With American data centre supply now in question, markets believe opportunity may flow to other countries. And as in the US, non-American companies with established, operating data centres are being looked on more favourably.

NextDC has rallied a staggering 40% this morning. The trigger was Goodman and Digital Realty buying shares through a jointly owned vehicle at $9.50 each – a 45% premium to Wednesday's close – as they seek a 9.9% stake. We interpret the move as a combination of short sellers getting squeezed and an acquisition premium being priced in. It's a sharp reversal for a stock that had lost nearly 60% over the past year after power delays at its Melbourne M3 site.

That a US incumbent is paying up for Australian capacity the morning after the midterms is telling in itself.

Goodman, Centuria and Macquarie Technology Group are also up, though in the single digits. (ASX trading remains open, so these numbers are a moving target.)

Firmus, meanwhile, is unlisted, but we fully expect it to take a meaningful trim to its valuation. The neocloud index, a useful valuation comparable, is down almost 10%.

The Australian caveat

While the market reaction has been positive, data centres remain unpopular with the Australian public. Polling shows only 23% of voters want Australia to be a world leader in data centres, and a large majority think a data centre being developed in their neighbourhood is a bad thing.

Where Australia differs is that neither major party opposes data centres as firmly as the Democrats do in the US. Illustrating this, Albanese climbed down on Friday afternoon from his proposed suburban data centre ban after his office was approached by the AFR.

That's the opportunity – and the risk. ASX operators are benefiting from a regulatory gap between Australia and the US, but local sentiment means that gap could narrow.

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