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Is the Megaport (ASX:MP1) share price in the buy zone today?

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This year had been shaping up as a breakout for ASX technology company Megaport Ltd (ASX:MP1). Despite challenges posed by COVID-19, Megaport reported total revenues of $58 million for FY20, an uplift of 66% year-on-year. And, after executing two successful capital raisings during the year, Megaport ended FY20 with a cash position nearing $170 million.

In navigating the tough market conditions in FY20, Megaport seemed like it had the cash reserves to execute on its growth strategy in FY21.

However, the company’s share price tells a slightly different story. After surging to a new 52-week high of $17.67 in late August, the wind has gone out of its sails more recently. And, after the release of the company’s September quarter cash flow report on Wednesday, its share price was savaged. It dropped almost 15%, making it the worst-performing stock on the S&P/ASX 200 Index (ASX: XJO) that day.

What does it all mean?

So, is this a signal that it’s time to jump ship? Or is it instead a chance to snap up shares in a growing company for a bargain?

First, let’s take a look at what Megaport actually does, and then we’ll review the details of the recent quarterly update.

Megaport develops customisable ‘on-demand’ network services to corporate clients. It helps clients expand their network connectivity beyond the limits of traditional infrastructure by leveraging cloud-based technology. It also gives companies the flexibility to manage their bandwidth usage: customers can scale up their bandwidth when demands are high, and then reduce consumption during off-peak times. This allows companies to be more efficient with their data usage, cutting operational costs.

Expanding network connectivity and managing bandwidth usage has been a high priority for many companies this year, as COVID-19 restrictions have forced them to adopt remote working arrangements. So, it’s no real wonder that Megaport enjoyed significant growth in FY20.

Is there a problem?

Well, the real issue for Megaport might simply be that it has grown too fast. Short-term investors, who had become accustomed to certain levels of growth, felt let down by the figures in Megaport’s most recent quarterly report. But, for longer-term investors, there was actually plenty to like in the update.

Although quarter-on-quarter revenues only grew a modest 2% to $17.3 million, Megaport still reported a record quarterly increase in customer numbers. Most of that growth came from the US, where the company has been rapidly expanding its presence. Of the 19 new data centres the company added globally during the quarter, 10 were in the US.

Additionally, the company increased its investment in intellectual property due to the development of a new product, Megaport Virtual Edge, which it plans to launch in the second half of FY21. The Virtual Edge will expand Megaport’s network capabilities and increase security and performance for customers.

What’s ahead for the Megaport share price?

Despite short-term investors jumping ship, Megaport remains an exciting company to watch over the next 12 months for those with a longer-term outlook.

It is executing on its expansion plans and rapidly increasing customer numbers. Monthly recurring revenues in the second quarter should benefit from investments made during the September reporting period, which could signal that a share price recovery is just around the corner.

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Returns as of 6th October 2020

Rhys Brock owns shares of MEGAPORT FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends MEGAPORT FPO. The Motley Fool Australia has recommended MEGAPORT FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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