Company Reports

We expect Megaport will grow rapidly in the coming years in terms of revenue and profitability.

We lower our fair value estimate for no-moat Megaport by 17% to AUD 12.50 per share. Guidance for fiscal 2025 is below our expectations for revenue and EBITDA and hints at salesforce efficiency and product/market fit worse than we previously thought. Despite this, Megaport shares screen as undervalued. We believe slower revenue growth is partly driven by cyclical factors rather than purely by competitive pressures. The latter would be more permanent, if true, and would be of greater concern.

In its third-quarter sales update, no-moat Megaport reported its fourth consecutive quarter of positive cash flow and eighth quarter of positive adjusted EBITDA. It also said it expects capital expenditures for the full year to be around a third below last year, despite the business being around 30% larger. Management upgraded its full-year EBITDA guidance to AUD 57 million at the midpoint, from AUD 54 million, while leaving its revenue and capex guidance unchanged. We maintain our AUD 15 fair value estimate.

We expect Megaport will grow rapidly in the coming years in terms of revenue and profitability.

We expect Megaport will grow rapidly in coming years, both in terms of revenue and profitability.

We maintain our AUD 15 per share fair value estimate for no-moat Megaport following its fiscal 2024 second-quarter sales update. Megaport’s shares jumped around 30% on the update. Although the update was strong, we also see the stock price jump as continuing a trend of volatility coinciding with Megaport’s quarterly updates and possibly enjoying a lift with the broader technology sector rally during the day. At current prices, we continue to view Megaport’s shares as materially undervalued and not reflective of its long-term revenue and margin potential.

We expect Megaport will grow rapidly in coming years, both in terms of revenue and profitability.

We lower our fair value estimate for Megaport by 12% to AUD 15 per share following a transfer of coverage to a new analyst. We continue to believe that Megaport does not possess an economic moat. The decrease in our fair value estimate is driven by lower expected operating margins, partially offset by a lower weighted average cost of capital. We expect EBIT margins to expand to 32% by fiscal 2033 and use a WACC of 7.5%. We forecast revenue to grow at a 10-year CAGR of 18% over the next decade, primarily driven by growth in average annual recurring revenue, or ARR. We assign Megaport a Morningstar Uncertainty Rating of Very High and rate its Capital Allocation as Exemplary. At current prices, Megaport’s shares screen as materially undervalued.

Megaport typifies the overreactive short-termism of the market, and it continues to be an extraordinarily volatile stock. After nearly quadrupling within the past year to recoup about half of the 80% decline from its 2021 high, Megaport was down more than 15% in response to fiscal first-quarter results. Through it all, we’ve seen little change in the trends that underpin our investment thesis—fast revenue growth, ramping profitability, and services that will be in continually higher demand as more enterprises rely on data connectivity and cloud connections. Nothing in this quarter’s report changes our view, especially since the first quarter is typically slow and has often caused unnecessary worry. We’re maintaining our AUD 17 fair value estimate and see the stock as undervalued.

After releasing fourth-quarter results last month, Megaport issued full fiscal 2023 financials and 2024 guidance on Aug. 22 and yet again excited investors. While guidance unsurprisingly implies that revenue growth will decelerate from the 40% level of the past two years, the swing to profits the firm now expects is even larger than we previously projected.

Demand for software-defined networks, or SDNs, like Megaport offers should grow tremendously in coming years, as enterprises increasingly use cloud services, often with multiple cloud providers. Enterprises typically need to connect their private equipment to cloud partners, and data often needs to be transferred between cloud providers. Software-defined networks allow enterprises to quickly provision capacity through an online portal and flexibly adjust capacity to meet their current needs.

Megaport’s preliminary fiscal fourth-quarter results were unsurprising, considering the firm made an early announcement of its rosy profit and cash flow ranges two weeks ago. Even through its challenges last year, we continued to notice Megaport’s durably high growth rate and uninterrupted path toward profitability. The second half of fiscal 2023 marked what we view as the inflection point toward durable profits and cash flow, and new CEO Michael Reid, in his first earnings call, was enthusiastic about ways to drive the top line further.

Megaport’s stock skyrocketed 33% on July 11 after the company shared its new financial expectations for its fiscal 2023 fourth quarter, which it will report Aug. 22, and guidance for fiscal 2024. This marks the second enormous guidance boost in the last three months, leading to the stock more than doubling in that span. Nonetheless, we maintain that the market had become far too bearish on Megaport—which never faltered in moving rapidly toward profitability while keeping sales growth high—and we believe the stock is still undervalued, trading at a 30% discount to our AUD 13 fair value estimate.

After recent turmoil, a cratering of the stock price, and a CEO transition, Megaport’s fiscal third-quarter earnings release offered significant comfort that the company is on the right track. Founder, chairman, and interim CEO Bevan Slattery led the call, as new CEO Michael Reid will not begin until May 15. We had not been nearly as down on Megaport as the market was, but Slattery’s comments—and most notably his explicit guidance that EBITDA will come in significantly higher than market consensus in 2023 and 2024—exceeds even our bullish expectations.

Megaport has named Michael Reid of Cisco as its new CEO, effective May 15. In the same announcement, Megaport disclosed it has parted ways with CFO Sean Cassidy, effective immediately, and that a search for a permanent CFO is now under way. The abrupt CFO exit three weeks after a similar process with former CEO Vincent English is again inartful, but the board is seemingly unconcerned with optics. We suspect new top executives will now bring some stability and harmony with founder and board chairman Bevan Slattery. We’re maintaining our AUD 13 fair value estimate. We think the stock has gotten overly punished in the last year, while our outlook for the business has not materially changed.

Demand for software-defined networks, or SDNs, like Megaport offers should grow tremendously in coming years, as enterprises increasingly use cloud services, often with multiple cloud providers. Enterprises typically need to connect their private equipment to cloud partners, and data often needs to be transferred between cloud providers. Software-defined networks allow enterprises to quickly provision capacity through an online portal and flexibly adjust capacity to meet their current needs.

Megaport’s stock dropped 20% after the firm released its fiscal second-quarter sales update, continuing a recent trend of 10%-20% moves in either direction upon the firm’s quarterly report. Some metrics were disappointing in the second quarter, but we see that as noise driving unwarranted volatility, as Megaport has shown that its reported metrics are routinely choppy from quarter to quarter. Megaport’s trajectory has not deviated from its path of rapid sales growth and improving profitability. Halfway through fiscal 2023, Megaport is pacing ahead of our full-year projections for both revenue and adjusted EBITDA. We are maintaining our AUD 15 fair value estimate while we await next week’s release of the full first-half results, but we think the stock is significantly undervalued for long-term investors who can stomach the volatility.

Demand for software-defined networks, or SDNs, like Megaport offers should grow tremendously in coming years, as enterprises increasingly use cloud services, often with multiple cloud providers. Enterprises typically need to connect their private equipment to cloud partners, and data often needs to be transferred between cloud providers. Software-defined networks allow enterprises to quickly provision capacity through an online portal and flexibly adjust capacity to meet their current needs.

Megaport’s July 20 release of fourth-quarter sales and key performance indicators stabilized the stock, which had previously been acting as if there was a change to Megaport’s business. Just as the sales metrics showed there was no change to the firm’s top-line momentum, the Aug. 9 release of full fiscal 2022 financials showed the firm continues taking advantage of operating leverage and moving toward profitability. We believe the story is intact and are not making material changes to our forecast while maintaining our AUD 15 fair value estimate.

Demand for software-defined networks, or SDNs, like Megaport offers should grow tremendously in coming years, as enterprises increasingly use cloud services, often with multiple cloud providers. Enterprises typically need to connect their private equipment to cloud partners, and data often needs to be transferred between cloud providers. Software-defined networks allow enterprises to quickly provision capacity through an online portal and flexibly adjust capacity to meet their current needs.