Megaport Is Making Significant Strides Toward Profitability Without Sacrificing Sales Growth

Business Strategy & Outlook:

Demand for software-defined networks, or SDNs, like Megaport offers should grow tremendously in coming years, as enterprises increasingly use cloud services, often with multiple cloud providers. Enterprises typically need to connect their private equipment to cloud partners, and data often needs to be transferred between cloud providers. Software-defined networks allow enterprises to quickly provision capacity through an online portal and flexibly adjust capacity to meet their current needs. Megaport’s growth has been driven both by adding new customers at high rate while also seeing customers use its services more. The firm has averaged more than 20% average annual customer growth the past three years while still seeing services per customer and revenue per service grow, despite the higher base. The trend is expected to continue as customers continue to increase their reliance on multiple cloud providers and become more aware of Megaport’s alternative to traditional connectivity options. Megaport enables firms to locate equipment in fewer data centers and connect remotely with an alternative to traditional telecom connections (which can be inflexible and expensive) and the public internet (which is less reliable and secure).

Risk and Uncertainty:

The biggest risk, is that numerous companies would eventually be able to provide similar services, leading to a lack of pricing power and inability to earn attractive returns. Currently, Megaport has a bigger footprint than its rivals. It has a global presence in more data centers than competitors, and it has a relationship with all the biggest cloud providers, which is thought to be key to attracting customers. Against that backdrop, Megaport has seen revenue grow rapidly and margins improve substantially over each of the five years since the company’s initial public offering. The firm’s current market valuation implies the trend will continue, but if competitors can close the gap and offer comparable connections to customers, Megaport might have to compete more on price. In addition to the threat from copycat firms, Megaport could be susceptible to traditional network providers that own infrastructure and have historically met enterprises’ network needs. With existing ownership of the same types of assets that Megaport must lease and existing relationships with many of the cloud providers, data centers, and enterprises that support Megaport’s business, they would be well positioned to enter the market if the opportunity is enticing. Megaport’s biggest ESG risk is that of a data or security breach, given the firm is entrusted with and handles such high volumes of sensitive data. The financial and reputational damage that could result from a severe security breach could be devastating.

Bulls Say:

The rise in data usage, the need to access data, and the use of cloud providers leaves many more firms needing network services. Megaport’s software-defined network is a better solution than the expensive and stodgy traditional networks.
Partnerships with data center firms, telecom companies, and networking firms like Cisco and VMware support Megaport’s business and give it an advantage over other startup SDNs.
Operating leverage is taking hold and puts Megaport on the cusp of becoming very profitable while it is maintaining high sales growth.

Company Description:

Megaport is a software-defined network service provider that allows enterprise customers to connect between data centers. At the end of fiscal-year 2021, Megaport was connected to 423 data centers in more than 130 cities throughout North America, Europe, Asia, and Australia. Most of the firm’s customer connections are to cloud service providers, like Amazon Web Services or Microsoft Azure, but Megaport also enables customers to connect between their own equipment in different locations and to internet exchanges. With a softwaredefined, rather than traditional, network, customers have flexibility to adjust connection needs almost instantaneously through a self-serve online portal without long-term commitments.

(Source: Morningstar)

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