The ASX tech sector is relatively small compared to the much larger US NASDAQ tech sector. However, it is home to a growing number of exciting tech shares, including Megaport Ltd (ASX: MP1).
You may be familiar with names such as Appen Ltd (ASX: APX), Afterpay Ltd (ASX: APT) and Xero Limited (ASX: XRO), but perhaps not Megaport.
Here’s why I think this fast-growing tech share is a good buy and hold option for the long term.
What does Megaport do?
Megaport provides a ‘network as a service’ offering to enterprises, or what is commonly referred to as “elastic interconnection services”.
This enables enterprises to increase or decrease their fixed broadband bandwidth. They can do this in response to their own usage requirements and can then ramp up their bandwidth requirements during busy times. Likewise, they can reduce it when demand is lower.
The service is provided via a network of cloud providers, data centre operators, and network service providers.
A simple mobile application enables users to access services for as short or as long a period as they require.
Why is the Megaport business model so compelling?
Megaport has a subscription-based billing model.
This is much more beneficial than being tied to regular network service agreement levels, or expensive long-term contracts.
It also provides Megaport with a sticky recurring revenue stream, receiving revenue from not just the network access points, but also the services that customers consume within the ecosystem.
As more network access points are added, more customers are attracted to joining. Also, existing ones tend to consume more. Thus, the ecosystem continues to grow and grow over time.
Megaport has a geographically dispersed customer base across the Asia Pacific, Europe and North America. This provides it with a diversified income stream.
It also partners with all the leading cloud operators including Amazon Web Services, Google Cloud and Microsoft Azure, further strengthening its business model as none are in direct competition.
Strong customer demand in a fast-growing industry
Megaport is growing rapidly within a fast-growing industry. Demand for its services continues to grow strongly.
It is connected to over 60 data centres globally. And this number continues to climb. The amount that enterprises worldwide continue to spend on cloud computing services is increasing at a rapid clip.
This is leading to solid customer and revenue growth, shown through Megaport’s share price.
In the first half of FY 2020, Megaport reported a massive 70% increase in revenue to $25.9 million.
Its March 2020 quarter update revealed a 10% increase in revenue, quarter on quarter. At the end of March, it had a healthy cash balance of $108.7 million.
Are Megaport shares a good long-term investment?
Buying Megaport shares is potentially a risky investment. Its revenues are growing rapidly and it is still yet to reach profitability.
Also, its current share price is factoring in the expectation that it will continue to grow at a high growth rate. If it fails to meet its growth targets, its share price could be hit harshly over the short term.
However, I still believe Megaport is a good long-term investment. This is despite the possibility of short-term share price volatility.
Megaport is well placed to tap into the rapid rise of cloud computing and the need for rapid connectivity. The global public cloud services market continues to expand rapidly, as more infrastructure migrates to the cloud.
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Phil Harpur owns shares of AFTERPAY T FPO, Appen Ltd, and Xero. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO, MEGAPORT FPO, and Xero. The Motley Fool Australia owns shares of Appen Ltd. 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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