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Is Megaport at an inflection point?

29042021_Megaport

Is Megaport at an inflection point?

Network as a Service provider (NaaS), Megaport (ASX:MP1) is a company we follow with interest, and one that we have commented on in several previous articles.

In late April, the company provided a third quarter sales and revenue update, and the market liked it, pushing MP1 shares up around 10 per cent on the day.  Although there was nothing very surprising in the Q3 revenue numbers themselves, clearly investors found something encouraging in the company’s disclosures on the day.

From our point of view, there are several encouraging pieces on information in those disclosures. Included in these are:

  • Megaport recently appointed an experienced Chief Revenue Officer, Rodney Foreman, and he is leading a transformation of the MP1 sales strategy, away from direct sales and towards “channel” sales through integration with leading service providers like Cisco which have a very broad reach. Successful execution of this transformation has the potential to significantly accelerate MP1’s future revenue growth.
  • The early signs on this are encouraging. Some acceleration late in the quarter was apparent, and MP1 goes into 4Q with a very robust sales pipeline and good momentum.
  • Looking back, while MP1’s revenues had not benefited from COVID as much as some might have hoped, this can be understood in the context of some of MP1’s clients, particularly in sectors like travel, reducing their data demands as a result of business disruption. MP1’s NaaS model allows customers to quickly increase – and decrease – their data consumption as needed, and while COVID did not immediately drive revenue growth for MP1, it has helped demonstrate the merits of the NaaS model.
  • Consistent with this, the company is seeing clients increasingly seeking to move away from legacy infrastructure towards the cloud, which is at the core of MP1’s offering. We think this trend provides a healthy tailwind for MP1 for many years to come.

MP1 remains a difficult business to value, given the relatively early stage of its development, but with run rate EBITDA breakeven expected to be achieved in June, the business is quickly approaching a point at which its scale and operational leverage will translate into hard dollars.  As investors, we are excited to see the full potential of the business starting to be revealed in the years ahead.

The Montgomery Funds and the Montgomery Small Companies Fund own shares in Megaport. This article was prepared 29 April with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Megaport you should seek financial advice.

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Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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