Megaport share price sinks 8% despite juiced-up growth forecast

This market darling upgraded its guidance but is still being sold off. Why?

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The Megaport Ltd (ASX: MP1) share price is under pressure on Monday morning.

At the time of writing, the leading network as a service (NaaS) solutions provider's shares are down 8% to $13.17.

Why is the Megaport share price sinking?

Investors have been selling the company's shares this morning following the release of its quarterly update and despite an upgrade to its guidance for FY 2024.

In respect to the former, according to the release, Megaport's year on year growth continued during the quarter.

It reported revenue of $49.5 million, which is up $11.4 million or 30% year on year. This lifted its annual recurring revenue (ARR) metric to $199 million.

Things were even better for its earnings before interest, tax, depreciation, and amortisation (EBITDA), which almost doubled to $14 million from $7.3 million a year earlier.

However, while this is up strongly year on year, it is actually down 7.3% quarter on quarter. Management blamed this on investing in future growth.

Nevertheless, Megaport's net cash flow for the three months was $13.4 million. This is a big improvement from a cash outflow of $8.5 million in the prior corresponding period.

This led to the company finishing the period with a cash balance of $73.1 million And after accounting for its vendor financing facility of $13.9 million, Megaport has a net cash position of $59.2 million. This is up from $45.8 million at the end of December.

Guidance upgrade

In light of its performance in the third quarter, the company's board has upgraded its earnings guidance for the full year. Its release advises:

[A]s a result of continued improvement in the Company's operating and financial performance, the Company upgrades FY24 EBITDA to be in the range of $56M to $58M, an increase on the previous FY24 guidance of $51M to $57M. This reflects an increase of 177% to 187% compared to FY23 Normalised EBITDA of $20.2M.

While this guidance is in line with Goldman Sachs' estimate of $56 million, it seems the market was pricing in an even stronger performance.

Management also advised that it continues to expect FY 2024 revenue to be in the range of $190 million to $195 million for FY 2024. This represents an increase of 24% to 27% on FY 2023's revenue of $153.1 million. This means that its earnings guidance upgrade is all due to stronger-than-expected margins.

The company's FY 2024 capital expenditure guidance of $20 million to $22 million has also been confirmed by management this morning.

The Megaport share price remains up almost 140% since this time last year despite today's decline.

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 Goldman Sachs Group and Megaport. The Motley Fool Australia has recommended Megaport. 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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