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Why aren’t investors more positive on the result for Megaport?

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

Megaport Ltd (ASX: MP1) announced an impressive set of annual results today, with monthly recurring revenue up 82% and now sitting at $3.6m. This puts the company’s annualised revenue at $43.3m, helping provide fundamental support to the firm’s recent share price growth. Megaport created 24 new cloud on-ramps and announced two new cloud partners over FY19, SAP and Nutanix, which helps support their value proposition. North America was by far the strongest area for growth, with revenue rising 154% to $13.6m, showcasing the company’s ability to successfully compete with Equinix’s cross-connect based solution within the mid-market.

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The interconnection system powering Megaport’s growth story (Credit: Megaport)

Megaport’s business model is based on facilitating interconnection within data centres, enabling smaller DCs to compete with dominant market giants like Equinix. The company’s interconnection-based systems allow enterprise customers to pick and choose which aspects of the cloud they want, and when. A traditional small DC will have one cloud and one server, requiring customers to rent a certain amount of data space for a long period, even if they only need it for 1 day a year. Megaport’s interconnections will allow customers to pick and choose a plan; a customer requiring DC space for one day a year, like a retailer needing the space for Boxing day sales, only rents the extra space for a day a year while other customers rent it the rest of the time. They can also pick and choose what they want from each of the cloud offerings on the Megaport platform, instead of being stuck with all the downsides of one cloud provider.

The business has high fixed costs to make a data centre “Megaport enabled”, and it takes a few years for enough customers to find enough use cases for additional services so that the company can make a profit. Megaport is focussed on dominating a large share of the DC market, especially within smaller data centres. This means that it will likely continue to make losses for a couple of years.

Nevertheless, the company’s network effects provide a huge competitive moat that allows Megaport to increase pricing and maintain high margins. Their main competitor is Equinix, offering a cross-connect based solution for the more premium end of the market, with better latency at a much higher price. A new competitor would have to offer an inferior product for a long time before getting market domination, making it much harder than when Megaport entered the market.

The market also likes the management team and attaches high valuations to most of the companies that Bevan Slattery, Megaport’s founder, listed. The company has rallied substantially this year and also trades on expensive multiples as institutional attention has been attracted to the stock. This is one of the reasons why the price didn’t move more this morning, and highlights how management will need to continue delivering sky high growth numbers to please investors at these prices.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)

(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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