Why you shouldn't be holding on to Megaport for dear life

It pains me to write this, as a long-term Megaport (ASX: MP1) shareholder, but today was not a good day. 

While EBITDA came in above analyst expectations, its revenues disappointed. However, it was its guidance for earnings and revenues in FY25 that sent its share price plummeting southwards. 

Megaport guided to EBITDA of $57-65 million in FY25, while revenues are set to be in the range of $214-222 million. Analysts had predicted these figures would be $71.1 million and $231.5 million respectively. 

Really, the biggest disappointment is that a company priced as a growth stock isn't growing as the market would expect, with ports up 6% year on year and total services up 11% over that same time frame. This growth was 8% and 26% respectively at last year's result - so the company's growth appears to be slowing. 

To learn more about the company's latest result and whether there is now value on offer given the stock is trading 20% cheaper than it was yesterday, Livewire spoke with Datt Capital's Emanuel Datt for his insights into the company's outlook. 

And for disclosure reasons, I still own the stock - begrudgingly, I'll admit I was unable to sell out. 

Megaport FY24 Key Results 

• EBITDA of $57.1 million vs guidance of $56-58M and FactSet estimates of $54.2 million
• NPAT of $9.6 million
• Revenue of $195.3 million vs guidance $190-195 million and FactSet estimates of A$195.6 million 
• Ports 8,777, +6% y/y
• Total Services 29,816, +11% y/y
• FY25 Guidance: EBITDA $57-65 million vs FactSet estimates of  $71.1 million and revenue of $214-222 million vs FactSet estimates of $231.5 million 

In one sentence, what was the key takeaway from this result? 

Underperformance on all metrics, slower growth than anticipated.  

Were there any surprises in this result that you think investors may have missed? 

I was actually surprised by how slow the growth was achieved. The company reported low percentage growth across total services. Given that Megaport is valued as a high-growth company, and before the result, it was trading on about 7 times forward EV/sales - I think the market was anticipating a lot more growth than it delivered. That's why it's been hammered over 20% today.

Another thing that stuck out to me was that it did not appear that they have captured any new large customers - and it's highlighted that Megaport is experiencing declining trends, in many ways. Ultimately, it looks pretty expensive compared to the rest of its peer group in the technology sector. 

I think the EBITDA guidance of $57-65 million was very soft given the valuation of $1.5 billion, and that market cap is after the drop today, so it's trading at almost 30 times forward EBITDA, which is pretty rich for a business that doesn't look like it's growing very fast. 

Would you buy, hold or sell MP1 off the back of this result?

Rating: SELL

I think it's going to take a lot for the perception of the company to turn around, now that the slowdown in growth has been so pronounced. So, I think there is still material downside risk to the business. 

Are there any risks investors should be aware of? 

I think what is really standing out, from my observation of the technology space, is that there seem to be some headwinds in terms of companies' ability to raise prices. A lot more services are becoming more commonplace. AI is basically compressing technology companies' ability to monetise. 

Ultimately, with this particular company, I think it's all about customer acquisition. And that is clearly slowing down in terms of Megaport's ability to impressively grow the top line. They have a team of people focused on improving the bottom line, so the EBITDA margins seem to be improving somewhat, but you can only grow that so much - it's not infinite, and there are only so many costs that you can cut. I think investors can expect top-line growth to remain flat or just grow by a single-digit percentage from here. 

From 1 to 5, where 1 is cheap and 5 is expensive, how much value are you seeing on the ASX today?

Rating: 3

I would say three, in the middle - the diplomat's choice. Certain sectors look expensive, and I think technology itself is looking more highly valued than other sectors, like retail or commodities for instance. It's hard to say that the market as a whole is exceptionally expensive - there are pockets of overvaluation out there but also good opportunities on the other side of that as well.