Why Megaport is one of the biggest holdings in the Montgomery Small Companies Fund
In this week’s video insight David interviews portfolio manager of the Montgomery Small Companies Fund Gary Rollo to discuss Megaport (ASX:MP1). Megaport has a market capitalisation of around 3.4 billion and the share price has increased 33 per cent in the past 6 months. Gary discusses the businesses’ competitive advantage and why we believe business growth will accelerate over the next couple of years.
Transcript
David Buckland:
Hello, my name is David Buckland, and welcome to this week’s video insight. I’m accompanied today by Gary Rollo, portfolio manager of the Montgomery Small Companies Fund. For context, the Montgomery Small Companies Fund kicked off on the 20th of September, 2019. And in the 26 months to the end of November, 2021, it’s put on 63.7 per cent after all expenses, which is an outperformance of 36.8 per cent, or an annualised 13.7 per cent. Today, Gary, I thought we’d talk about Megaport, (ASX:MP1). Megaport has consistently been one of the largest holdings in the Montgomery Small Companies Fund, has done remarkably well from a share price perspective, and has a market capitalisation of about $3.4 billion Australian dollars.
Gary Rollo:
Megaport, let me introduce it. It’s theme is cloud technology, it provides access to large corporate enterprises, to the burgeoning availability of all these new cloud services that are becoming available from those big household names like Amazon and Microsoft. So it’s megatrend is the cloud. Today, it has a pretty reasonable market size, but we expect that market size to grow as many more corporates make that transition to using these cloud services. The thing that we really like about Megaport, and have for some time, is that we can see it’s quite competitively advantaged. So it’s proposition is quite new, quite unique. What it does is it’s able to provide a single pane of glass that allows these corporate enterprises to access all of these cloud services in one location, irrespective of where those cloud services originate from. Because today, in our basement, there’s a server that does all of the computing work, in the future, that server’s not going to exist, it’s going to exist in a data center somewhere.
Gary Rollo:
And we’ve got to get that connectivity from where we are today to there. And Megaport takes care of that seamlessly. In the future, you won’t even know where your workloads are being processed, Megaport will help you move those workloads around. So that’s the thing that’s really exciting. It’s a first mover in that market. It has over 700 data centers globally. And as I say, that competitive advantage of being able to allow you to move workloads around anywhere you like is the key feature, and to do it friction free. Its business model is very attractive in our perspective, it’s highly profit dense, deeply scalable and capital light.
Gary Rollo:
We’ve got some big catalysts coming up as well, that’s why it’s one of the biggest stocks in our portfolio right now. The selling model and technology that really works, yet when you start off, this company was a startup a few years ago, and it needed to hire salesmen directly to go out and knock on every door. But as the product becomes more mature, it’s capability to be sold by others, or resold by a reseller channel, becomes very powerful. And that’s the prevalent technology sales model out there in the world, and that part of the business is really kicking off. So we think that the ability to repeatedly sell is probably rising three or four fold now versus the past. And that’s the exciting thing for us. So in summary, Megaport, it has the potential to be a world beater, and it’s going to have great unit economics as we enjoy that journey of growth, we think accelerating over the next couple of years, driven along by the cloud. So that’s why it’s one of the biggest stocks in the portfolio.
You can watch David’s previous interview here: Two companies benefiting from the reopening trade
The Montgomery Small Companies Fund owns shares in Megaport. This video was prepared 06 November 2021 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.
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
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.
Jeff
:
Many thanks.
Jeff
:
What are your current thoughts on Megaport?
David Buckland
:
Hi Jeff,
The following comments are before Gary Rollo, Portfolio Manager of the MSCF, has had an in-depth discussion with MP1 management, which is anticipated for next week.
There has been no shift in the fundamentals and we believe this to be a temporary (yet severe) blip. With the exception of the negative foreign exchange translation, the growth rate for the March 2022 Quarter approximated half the growth rate of prior Quarters at 6 per cent versus 10-12 per cent.
MP1 is moving their salesforce from Direct to Indirect, and the Company is only just one-third of the way through this process (and attracting additional costs).
As this transformation to Indirect gains traction, we expect Quarterly revenue to grow strongly.
MP1 is a very high margin business and a strong increase in revenue over time will see their Quarterly cashflow moving from negative to positive and that will likely coincide with the market looking to re-rate the stock.