Megaport surges on stellar quarterly results and optimistic forecasts
With surging quarterly results and a bright outlook, Megaport’s (ASX:MP1) recent performance ignites optimism, marking an impressive rebound and spotlighting the company’s strategic growth amidst the tech industry’s evolving landscape.
Megaport was first mentioned here on the blog on 8 August 2019. At the time, the share price was $7.20. Gary Rollo subsequently listed Megaport as one of the Montgomery Small Companies Fund’s ‘structural growers’ in a blog post entitled, A look at companies exposed to tailwinds, on August 29 of the same year. Ever since, we have nominated Megaport as high growth, a beneficiary of a vaccine or an opportunity to benefit from the carnage in tech stocks.
In 2019, the shares rallied almost 190 per cent. In 2020, Megaport’s shares rallied another 36 per cent. That success was repeated in 2021 with a nearly 30 per cent gain. But in 2022, amid the fastest acceleration in interest rates in living memory, Megaport’s shares tumbled 66 per cent, giving up fully two-thirds of its gains since listing. The Montgomery Small Companies Fund did not remain dormant, adding more Megaport shares to its existing holdings. In 2023, the shares rose more than 40 per cent. And so far this year, shares are up almost another 40 per cent.
The reason for the most recent bounce is the impressive earnings beat that captured the market’s attention, resulting in a significant 30 per cent spike in its share price in a single day. This reaction came on the heels of management’s cautious guidance for the second quarter, setting the stage for what could be a pivotal moment in the company’s trajectory. With the company’s sales team now fully integrated, expectations are building that a strong performance in the fourth quarter will see the company meet or perhaps exceed the upper end of its guidance.
Revenues of $48.6 million for the third quarter were up five per cent quarter-on-quarter (QoQ). Annualised recurring revenues (ARR) are now at $192 million, up four per cent QoQ. The earnings before interest, taxes, depreciation, and amortization (EBITDA) of $15.1 million was strong and up to 50 per cent better than consensus analysts expectations of $10 million. Positive net cash flow was maintained at almost seven million dollars, and net cash now sits at $45.8 million. Importantly, capital expenditures were revised lower from $28 to $30 million to $20 to $22 million.
The company, a self-described growth business, is not slowing down its investment in expanding its sales team and sales channels. This decision is now backed by solid financials. The company is guiding FY24 revenues of $190-195 million. While some analysts may point to increased anticipated costs, particularly from new sales hires, as a negative, it does not deter the optimistic outlook, with our belief that guidance for the year is within reach.
A deeper look into the company’s robust quarter reveals EBITDA outperforming estimates significantly. This success was partly due to a notable contract with a Global WAN client, which bolstered ARR and underscored the potential for future growth. Megaport’s strategic moves, including increasing its sales headcount, are expected further to fuel revenue and EBITDA in the coming years.
Keep in mind we have previously described this business as a structural grower, one benefiting from the tailwinds of cloud computing and more recently demand from artificial intelligence (AI).
We believe momentum is building. The company’s revenue and ARR displayed solid growth, and operational metrics like ports, customers, and total services added have seen incremental improvements. Moreover, Megaport’s commitment to cost-effective operations and strategic investments, such as the expansion of its 400G U.S. Backbone and the launch of new products, positions it well for sustained growth.
Analysts are sitting up and taking notice. They have recently responded positively to these most recent developments, adjusting their forecasts upward and pointing to a compelling long-term opportunity for the company – something we have been noting since 2019! The structural shift towards multi-cloud and AI technologies plays into Megaport’s strengths, suggesting a promising outlook for its services.
As the market watches closely, all eyes are on Megaport’s ability to leverage its recent sales force expansion and product innovations to accelerate growth in the fourth quarter. The consensus among observers is clear: Megaport is on a path to meeting and exceeding expectations, marking it as a stock to watch in the evolving tech landscape.
The Montgomery Small Companies Fund owns shares in Megaport. This blog was prepared 07 February 2023 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.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
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.
Zane
:
Hi Roger
Recently i asked you about why you recommend REA given your intrinsic value calculation suggested it was overvalued. You kindly replied that with interest rates easing it was reasonable to reduce the required return factor to less than 10%.
Ok. But I am now even more puzzled by your positivity around MP1 which seems to be seriously overvalued by every measure I test including yours. It continues to report negative ROE and therefore seemingly not a good investment based on your book. Also, by a DCF model it is overvalued by around 95%.
I am trying to understand how this recommendation aligns with the strong case you made repeatedly in your book value able that a strong ROE is key to a company’s intrinsic value. And this should guide your investing or else you are just speculating. Yet here with MP1 you are quite positive about a company with repeatedly negative ROEs.
Are there special circumstances at play where your IV based investing can be ignored? As a relatively new investor, who was inspired by the logic in your book, I am struggling to reconcile the points in your book with some of your recommendations made here.
Regards
Zane
Roger Montgomery
:
Hi Zane,
The value.able approach to investing is but one approach to long-term equity investing. There are however a variety of ways to make money in the market. MP1 sits in the Montgomery Small Companies Fund.
The small-cap team adopt a very different approach to identifying/deriving undervalued/unrecognised/underappreciated opportunities. MP1 fits their approach to quality and prospects.