Megaport (ASX:MP1) was the ASX’s star performer yesterday jumping 23 per cent on the close following a trading update that clearly surprised many in the market. I joined Roger to discuss why it is a holding in the Montgomery Small Companies Fund and identify the two big messages in the release yesterday.
Transcript
Roger Montgomery:
A big day for Megaport yesterday. At one point, the stock was up 28 per cent. I think it closed up 23 per cent on a trading update, which also noted that the company had recorded its first profit. Give us your impressions and tell us what you know about the company.
Gary Rollo:
I think there were two big messages in the release yesterday. Megaport has suffered like other growth stocks have, but probably more than those other growth stocks because what it had disappointed in its rate of growth over the past couple of quarters. That rate of growth had been something like 50 per cent run rate per annum, which is a big number. And it slipped back to something like 25 per cent run rate. The stock market doesn’t like that. It particularly doesn’t like that in weak markets. And investors were comforted yesterday by the fact that the trend looks like it stopped and reversed. And if you look at the data, the run rate of the business is moving back towards that 50 per cent again. So I think the market took a lot of comfort from that.
Gary Rollo:
The second point that we got yesterday was around the company’s cash generation or cash burn. As you pointed out, the company put out its first EBITDA positive quarter. It’s actually its second EBITDA positive quarter. But what was significant about this was that it made a commitment on its call yesterday to say, look, we’re going to be thereabouts now. And what that does is it takes off the table some of the associated balance sheet risk with effectively running a business that’s not making profits. That was effectively the two big takeaways from yesterday.
Roger Montgomery:
So the market had some concerns over the balance sheet and the company reassured the market on that front.
Gary Rollo:
That’s exactly right. Those weren’t concerns that we had, but the market’s a big place and everyone sets the price of equity. And part of the story that the market was concerned about, was the ability for this business to get to that point where it’s self-sustaining, with it’s existing balance sheet position. The company’s got 80 million dollars of cash on its balance sheet today. And that should be plenty enough to see it through to that self-sustaining point. From a point of view of what the stock does from here, I think that’s the interesting outlook.
Roger Montgomery:
The market’s going to do what the market does and we can’t forecast that, but perhaps you could talk a little bit about what you think the company’s going to achieve.
Gary Rollo:
So if we think about the backdrop of what I’ve just said, it’s back towards that trend of growth and taken off the table some of the risk associated with the balance sheet. So now we’re looking forward and we’re understanding what needs to happen in this business. And I think there’s two big things. One is to maintain that ability to grow from the development of the company’s channel. Most technology that’s sold to corporate enterprises isn’t sold by the Megaport salesmen. You don’t buy your Microsoft license from a Microsoft salesman knocking on the door. You buy it from the guy that’s your IT services partner that knows your business and knows what you need. Megaport’s developing that part of its business. It’s called the channel. That’s going to be a non-linear event, but what it does is it dramatically increases its addressable market and its ability to sell. Good technology companies are effectively repeatable sales machines and that’s why technology really works. So that’s the first thing, the development of that channel and how that goes.
Gary Rollo:
I think the second thing’s more of a bigger picture scenario. We’ve all seen that growth stocks have been on the nose over the course of the last six to nine months. The market’s decided it’s concerned about what it wants to pay for growth. I think as some of those big macro factors that have gone into that fear settle down a bit, growth will get more attention again. So those are the two factors that will no doubt drive the Megaport share price from here.
Roger Montgomery:
Terrific, Gary. Well, I’m sure people who see this video and will have some more questions and they’ll probably post them on the blog. So perhaps we’ll get together and talk about Megaport again in the next little while.
The Montgomery Small Companies Fund owns shares in Megaport. This video was prepared 21 July 2022 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Megaport you should seek financial advice.