The ASX Stock Keeping Pace with Nvidia

In the last two years, Nvidia (NASDAQ:) has broken up the famous FAANG stocks and helped build the new ‘Magnificent Seven’, leading the way in performance thanks to its extraordinary earnings growth. The semiconductor giant grew earnings by 288% in 2023, taking full advantage of the current AI revolution.

Although Nvidia has stolen the limelight, there is an ASX stock keeping pace with Nvidia in the last 12 months, Megaport (MP1).

Both stocks have gained over 200% in the last 12 months, rewarding investors. But, how has this small ASX business kept up with the tech powerhouse, and what can investors expect moving forward?

*Past performance is not an indication of future results. Data as of 18th April 2024

The Basics

Megaport operates a global network infrastructure and manages this network through software-defined networking (SDN). It offers a platform that allows businesses to connect their IT infrastructure to various cloud service providers, data centers, and other networks around the world.

Imagine Megaport as a digital bridge. Instead of a company building separate bridges to each cloud provider or data center they want to connect to, Megaport provides a single platform where they can easily set up and manage these connections. This makes it faster, more flexible, and cost-effective for businesses to expand their network capabilities and access the resources they need.

As we continue to see the world transition to cloud and artificial intelligence, networks are becoming more complex and driving higher data consumption, leading to increased usage from Megaport’s customers. This is seen across the business; once customers are established, they remain within the ecosystem and grow their sales organically.

Financial Health Check

Megaport has a high recurring revenue model, and in its FY24 half-year results, it saw record recurring revenue at AUD$192 million, up 29% from the year prior. The business is not only retaining and growing existing customers but also continuing to add new customers. It has over 2800 customer accounts worldwide, including Tesla (TSLA (NASDAQ:)), Adobe (NASDAQ:), BHP (BHP) and TikTok. New CEO Michael Reid, formerly of Cisco (NASDAQ:), took over the business in 2023, and his new efforts to improve Megaport’s go-to-market strategy are starting to bear fruit. This has been helped by a considerable improvement in net cash flow, jumping to $12.5 million, up from the $28 million net cash outflow a year earlier.

Megaport’s margins are also a standout, growing gross margins to 70% in its FY24 half-year results, helping to deliver a record EBITDA of AUD$30 million, an improvement of 785% year-over-year. Importantly, the business is profitable, reporting a net profit of $4 million, another significant improvement. The focus from management will now be on delivering continued profit growth. For the full fiscal year 2024, the business expects to deliver revenue and EBITDA of between $190-$195M and $51-$57M, respectively.

*Past performance is not an indication of future results.

What’s Next for Megaport?

Megaport finds itself in a sweet spot of being an early mover in the software-defined networking (SDN) space as the growth of AI continues, and businesses, more than ever, need to ensure they have the right network to harness AI’s potential. By using Megaport, companies can ensure secure, fast, and dedicated connections between their data sources and Gen AI platforms.

The risks lie in the lofty expectations that investors now expect from Megaport. Shares have risen 200% in the last 12 months, which means the business needs to deliver. The company looks to be on the right track, but it will need to continue growing its recurring revenue base to further improve margins, a key expectation that the market expects. Megaport enjoyed an early-mover advantage for many years, but as the growth of AI soars, we will likely see competition rise, which may increase customer acquisition costs.

As more businesses move their operations online and adopt cloud technologies and artificial intelligence, the need for efficient and scalable network connections becomes crucial, giving Megaport a long runway to grow. Megaport also gets the backing of analysts, with a ‘strong buy’ consensus, showing the stock has further upside potential. Despite having a “strong buy” from analysts, the average price target is modest at $14.57. Analysts are waiting for the next earnings report and guidance before considering a higher price target to confirm the business can keep delivering, especially after a solid run. But, one look at Nvidia tells us that AI is opening up a wealth of opportunities, with the mega-cap name continuing to deliver quarter after quarter.

It won’t all be one way for Megaport over the next 12 months, and it will need to be at the top of its game to keep up its performance against Nvidia. But, it has already proven that it can do just that, making it a stock that long-term investors should watch.

Josh Gilbert, Market Analyst at eToro

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