Megaport Investors On Edge, Brokers Calm

Australia | Apr 27 2022

While Megaport’s share price continues to fall, brokers remain focused on the long-term opportunity.

-A weaker-than-expected third quarter for Megaport
-Earnings potential delayed rather than reduced
-Large barriers to entry for Megaport Virtual Edge product
-Accelerated sales expected after short-term pain from a new sales strategy
-Sales acceleration is considered key from here

By Mark Woodruff

Shares of global network-as-a-service provider Megaport ((MP1)) continue a relentless slide, last trading at $8.98 down from $22 last November.

Nonetheless, brokers remain focused upon the long-term opportunity given the long runway for growth in cloud/multi-cloud demand. Goldman Sachs also points to efficiency benefits from network ‘softwarisation’ and the company’s product lead.

Essentially, Megaport enables firms to easily and flexibly purchase dedicated data connections to service providers. This especially relates to cloud service providers including Amazon, Microsoft, Google and many others on the platform.

Last week’s third quarter update by the company was weaker than brokers within the FNArena database expected, causing a fall in the average 12-month price target to $15.19 which suggests 69.3% upside to the latest share price.  The database has five broker ratings with three Buy or equivalent ratings and two Hold ratings.

Annual recurring revenue was up 3% quarter-on-quarter in Australian dollar terms, while cash operating costs increased by 1.6% and capital expenditure climbed by 23%. Given chip and supply chain issues, the company brought forward around six months of capital expenditure and inventory increased by around $10m.

The results were dragged down by currency impacts, which halved revenue growth on translation back to Australian dollars. Also, time spent by the direct sales team in training channel partner sales teams on the Megaport Virtual Edge (MVE) product weighed, points out Morgans.

While UBS pushes back its growth profile for Megaport due to lower average revenue per port and a slower ramp-up in MVE sales, it’s felt the third quarter result pushes out the company’s earnings potential, rather than reducing it.

Training up partners for MVE

The combination of building a market leading product like MVE in a relatively new market takes time and effort to educate partners and customers, explains Morgans. The relatively new market refers to a software-defined wide area network (SDWAN), which allows enterprises to securely and intelligently direct traffic across the WAN toward trusted software-as-a-service and infrastructure-as-a-service providers.

The broker notes all the top five SDWAN players, covering around 70% of the market, are selling and have live MVE’s, meaning they have completed first sales. While these partners have huge sales engines it generally takes time and effort to build sales momentum.

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