It has been a positive day of trade for the Megaport Ltd (ASX: MP1) share price on Thursday.
In afternoon trade the global elastic interconnection services provider’s shares are up 4% to $12.63.
At one stage today the Megaport share price was up as much as 7% to $12.98.
Why is the Megaport share price charging higher today?
The catalyst for the solid rise in the Megaport share price today has been a broker note out of Goldman Sachs this morning.
According to the note, the broker has upgraded the company’s shares to a buy rating with a $15.00 price target.
Even after today’s solid gain, this price target implies potential upside of approximately 19% for Megaport’s shares over the next 12 months.
Why did Goldman Sachs upgrade Megaport’s shares?
Goldman Sachs made the move in response to its recent second quarter update. It notes that the company delivered a result largely in line with its expectations.
And while it acknowledges that new customer growth was weak, the broker attributes this to a combination of COVID-19 in the Northern Hemisphere and the US presidential election.
Instead, Goldman thinks that investors should be focusing on two key underlying trends that remain robust. These are the number of services per customer and its average revenues per user, which are both increasing.
In addition to this, the broker was pleased to see management reiterate that it expects to be operating cash flow positive consistently from the fourth quarter. Given its strong balance sheet, Megaport should comfortably make it to profitability without a capital raising.
Looking ahead, thanks to strong demand for public cloud infrastructure and the broadening of its product suite, Goldman is very positive on its growth outlook and is forecasting revenue to grow from $58 million in FY 2020 to $149.5 million in FY 2023.
What about its valuation?
Goldman acknowledges that Megaport’s shares aren’t conventionally cheap, but it still sees a lot of value in them.
It explained: “While MP1’s does not screen as absolutely cheap (refer Exhibit 4), we believe its multiple reflects (1) a scarcity of opportunity for investors in Australia to get exposure to the public cloud adoption theme, (2) its competitive landscape being relatively more benign than peer group, and (3) its structural tailwinds having more visibility and resilience than its peers (i.e. public cloud migration a global theme). We note that MP1 is now also trading at the lower end of its historical EV/Sales range.”
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Returns as of 6th October 2020
More reading
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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends 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 Bruce Jackson.
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