Why did Megaport shares rocket 70% in May?

Megaport Ltd (ASX: MP1) shares were among the best performers on the Australian share market in May.

During the month, the network-as-a-service provider’s shares rocketed an incredible 70%.

This compares very favourably to a gain of 0.75% by the benchmark S&P/ASX 200 Index (ASX: XJO).

Why did Megaport shares smash the market?

Investors were scrambling to buy the company’s shares after it followed up a big announcement late in April with an even bigger announcement in the middle of May.

Late in April, Megaport revealed that its Latitude.sh business had secured a major new customer contract for compute and storage. The customer signed a 36-month contract with a total value of approximately US$25.1 million (A$35.4 million). It notes that this represents approximately US$8.4 million (A$11.8 million) in annualised recurring revenue (ARR).

That announcement was already giving investor sentiment a boost early in May, but the announcement that followed a couple of weeks later is what really put a rocket under Megaport’s shares.

That announcement revealed that the Latitude.sh business had secured three major GPU, CPU, network, and storage contracts across two customers. Management stated its belief that this reinforced its position as a critical infrastructure partner in the accelerating artificial intelligence (AI) ecosystem.

According to the release, the contracts represent a combined total contract value (TCV) of approximately US$182.9 million (A$254 million), representing approximately US$65.2 million (A$90.6 million) in ARR.

Two of the contracts, representing approximately 90% of the TCV, have 36-month initial terms, while the third contract has a 24-month contract term.

Megaport’s CEO, Michael Reid, commented:

We are at the forefront of an accelerating inflection point across the industry. As use cases shift from AI foundation models to inference and the edge, Megaport is becoming an essential platform for powering the applications of tomorrow with globally distributed, automated infrastructure.

Whether supporting AI, edge compute, or anyone requiring instant global reach and performance, Megaport is a one-stop platform for the AI ecosystem, providing on-demand, software-enabled performance of dedicated hardware with the flexibility of a global network.

Positive broker response

In response to the news, a number of leading brokers upgraded their earnings estimates and valuations accordingly.

Arguably the most bullish was the team at Macquarie Group Ltd (ASX: MQG), which retained its outperform rating with an improved price target of $26.30. The good news is that even after its heroics in May, this price target still implies potential upside of almost 60% for Megaport’s shares over the next 12 months.

This may bode well for its performance in June.

The post Why did Megaport shares rocket 70% in May? appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has positions in Megaport. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Macquarie Group and Megaport. The Motley Fool Australia has positions in and has recommended Macquarie Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.