Megaport share price hits multi-year low: Is this a buying opportunity?

Is the weakness in the Megaport share price a buying opportunity?

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A young woman wearing a blue and white striped t-shirt blows air from her cheeks and looks up and to the side in a sign of disappointment after the ASX shares she owns went down today

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Key points

  • Megaport shares have dropped to a multi-year low on Tuesday
  • This morning a leading broker took an axe to its price target for the tech share
  • However, it still suggests that the company's shares could double from current levels

The Megaport Ltd (ASX: MP1) share price has come under pressure on Tuesday.

So much so, this afternoon the network as a service company's shares have dropped over 5% to a multi-year low of $5.96.

This means the Megaport share price is now down almost 70% since the start of the year.

Why is the Megaport share price falling today?

Investors have been selling down the company's shares on Tuesday in response to weakness in the tech sector and the release of a mixed broker note out of Citi.

In respect to the latter, Citi has retained its buy rating but slashed its price target by 26% to $12.30.

Though, it is worth noting that even after this sizeable cut, Citi's price target implies potential upside of over 100% for investors over the next 12 months.

Why did the broker cut its price target?

According to the note, the broker has reduced its valuation to reflect lower earnings estimates due to price reductions for Megaport's services.

Citi acknowledges that some investors may interpret these price cuts as a sign of softening demand and sees potential for Megaport to fall short of consensus estimates in FY 2023 because of the softer pricing.

However, it believes the price cuts are being used to help the company increase adoption rather than being demand related.

Furthermore, it still expects Megaport to deliver very strong revenue growth despite these cuts. Based on this, it feels the Megaport share price is very attractively priced at the current level.

Citi explained:

While the reduction in MVE pricing could suggest softer demand, we see the new bandwidth options as positive as high IP transit costs was a barrier for MVE adoption in ANZ and it could also drive adoption among existing SDWAN customers.

While we see risk to consensus forecasts in FY23e, with the stock trading on 6x revenue, with 30%+ topline growth, we maintain our Buy call but lower our target price by 26% to reflect higher cost of capital and earnings downgrades.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended MEGAPORT FPO. The Motley Fool Australia has recommended MEGAPORT FPO. 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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