Megaport

1. Megaport (MP1, $7.57)

Market capitalisation: $1.2 billion

12-month total return: –26.5%

3-year total return: –29.4% a year

FY25 estimated dividend: no dividend expected

FY25 estimated price/earnings (P/E) ratio: 63.1 times earnings

Analysts’ consensus target price: $11.13 (Stock Doctor/Refinitiv, 14 analysts), $11.98 (FN Arena, six analysts)

Megaport is a global Network-as-a-Service (NaaS) provider, meaning it enables businesses to easily and flexibly purchase dedicated data connections on demand. MP1 connects customers to service providers, especially cloud service providers (CSPs) including Amazon Web Services, Microsoft Azure, Google Cloud, IBM, Salesforce and many others on the platform. Megaport’s offering enables businesses to expand their data centre connections quickly and affordably as their needs change.

To use the cloud the two sets of data centres need to be connected, which is where Megaport comes in. There are about 300 cloud “on-ramps” around the world, where companies can connect to use the CSPs’ equipment. With its automated network, Megaport connects more than 930 data centres worldwide (of about 6,500). It has a footprint in most of the cloud on-ramp data centres globally and is rolling-out into the “other” data centres (the 98% of the market without cloud on-ramps). Once Megaport is established in the “other” data centres customers are able to use Megaport’s secure and scalable CSP connection. Megaport operates the most NaaS connections to CSPs in the world. It has a presence in 26 countries, having recently launched in Italy and Brazil.

North American customers contribute most to revenue (57%), followed by Asia-Pacific (27%), and EMEA (Europe-Middle East-Africa), on 16%. Both annual recurring revenue (ARR) and ARR per service show very healthy growth rates, and the company broke through to profitability in FY24, turning a $9.8 million loss in FY23 into a $9.6 million net profit in FY24 (to June). Analysts expect net profit of about $21.7 million this financial year, and $34.5 million in FY26, although MP1 is not expected to pay a dividend, as it reinvests in growth.

As more businesses move to the cloud and increase their use of AI, they need reliable data centre connections. Megaport is well-placed to meet the growing need for cloud computing and AI. In its field, MP1 has first-mover advantage, scale and technical expertise, putting it in a strong position to grow rapidly and maintain a healthy competitive advantage. In particular, its new product solution, Megaport Virtual Edge (MVE), enables it to address the mass business telecommunications market globally, a much larger market than its original data centre-to-cloud solution. Disrupting the “legacy” telecommunications sector brings the prospect of far greater levels of competition, but analysts generally see Megaport as able to make a good fist of disrupting this bigger addressable market.

In the shorter term, the company disappointed the market this month in reaffirming its guidance for FY25. It expects FY25 revenue of $214 million–$222 million, a range that represents a rise over FY24 9.6%–13.7%. Apparently, the market expected an upgrade to this guidance, and the result was a 22% share price haircut.

That situation is par for the course when the market feels even the slightest bit disappointed with the kind of high price/earnings (P/E) ratio growth stock that Megaport is – but longer term, the growth story is still there, and the brutal market reaction should be seen as a tempting discount for an investor buying now. AI and cloud demand continues to drive huge growth in data centre demand and capacity, and Megaport is riding that wave. Broker Citi is the most bullish on the stock, with a target price of $16.05.