On Tuesday, Megaport Ltd (ASX: MP1) shares were sold off following the release of the network services company's quarterly update.
The company's shares ended the day almost 25% lower at $5.78.
Why were Megaport shares sold off?
Although Megaport delivered a result that was largely in line with expectations, its operational trends rattled investors and sparked concerns over its future growth.
A note out of Goldman Sachs this morning explains:
Although this result was in-line to ahead of GSe (2Q23 sales +3% vs. GSe), the key disappointment was the weakness in the operational trends, most evident in the sequential decline in MVE/MCR (both of which we view as important drivers of MT growth). Although requiring further analysis, part of this appears to be driven by (1) broader macro concerns causing a deferral in decisions (as is occurring globally); and (2) 'proof of concept' customers pausing services before potentially re-engaging.
Is this a buying opportunity?
While it was disappointed with the quarter, Goldman Sachs remains positive and sees plenty of value in Megaport shares.
According to the note, the broker has retained its buy rating with a trimmed price target of $8.10. Based on the current Megaport share price, this implies potential upside of 40% for investors over the next 12 months.
What did Goldman say?
Although Goldman has reduced its revenue estimates, it has boosted its earnings estimates to reflect management's focus on profitable growth. It also believes Megaport has sufficient cash to see it through to breakeven. The broker commented:
All in we revise FY23-25 revenues -1% to -15%. However from an earnings perspective, given a greater focus on profitable growth, MP1 has stepped up the cadence of its Jul-22 headcount reduction, and is now expecting $8-10mn cost reduction through FY24. Given the still strong revenue trends, this cost out has driven a step up in our near term (FY23-25) EBITDA of +35% to +4%.
Finally with the stronger near term EBITDA profile, specific guidance for capex to fall in 2H23/FY24, and the A$25mn debt facility, we still see ample headroom room for MP1 to achieve FCF breakeven by 2Q24.
All in all, the broker appears to believe that investors should be taking advantage of this share price weakness. Particularly given that its analysts "remain confident MP1 has a clear product advantage vs. peers and a decade-long runway for robust growth."
