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Does Megaport's Strong Share Price Growth Make It Too Expensive?

Jordan Baird

Jordan Baird is the head ASR Wealth Advisers client services desk and has been with the organisation since 2017. He first started investing in his early years. While he believes that investors should leave no stone unturned he has a particular interest in trading based on broad macroeconomic trends along with specific analysis of innovative up-and-coming companies.

Megaport Limited (ASX: MP1) is an elastic interconnection services provider to enterprises in Australia, Asia-Pacific, North America and Europe. Megaport represents high growth potential with a strong balance sheet composition and has begun FY20 with strong quarterly financial performance. They’ve recently reported a 10% increase in revenue from the previous quarter and Monthly Recurring Revenue of $4.1 million (up 13% quarter on quarter and a 71% increase over the previous corresponding period). Consequently, it comes as a surprise to many that Megaport Limited’s share price is down over 5% in the past day. However, this recent bearish behaviour represents only a small dip in an overwhelmingly positive 2019 for Megaport, which has seen a 160% increase in share price YTD.

megaport - report

Megaport, the interconnection services provider, is down nearly 5% despite the recent announcement of strong quarterly financial performance to start FY20 (Credit: Megaport).

The key drivers for the FY20 revenue growth are the expansion into new markets whilst simultaneously deepening its reach into existing markets. During said quarter, Megaport reached 304 installed locations and 535 enabled data centres globally. Furthermore, key partnerships with CyrusOne and EdgeConnex in Europe and the expansion of its Megaport Cloud Router (MCR) service footprint (which enables greater reach to cloud-to-cloud traffic and virtual routing capabilities).

Despite being unprofitable, Megaport Limited has seen strong share price growth for a number of reasons, namely, a financially healthy balance sheet (with assets vastly exceeding liabilities both in the short and long-term), strong leverage (debt to equity ratio of 2.3%) and satisfactory free cash flow, resulting in continuous outperformance of the market in terms of both revenue and share price growth. If revenue continues to grow at the current rate, Megaport is set to break even in 2022, at which point the stock’s return on equity and return on assets will become positive and its EPS and P/E ratio can be compared to that of industry competitors.

 


 

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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