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.