Buy this ASX 200 tech stock that’s crashed 27% this week: expert

Buying the dip is all good and well but when that dip is actually a 27% crash, it takes some courage for even the hardiest souls to purchase the stock.

That’s exactly the dilemma for investors looking at technology company Megaport Ltd (ASX: MP1) at the moment.

The stock was belted 24.7% on Tuesday, then took another 3.46% hit on Wednesday.

If you buy it, are you just burning your money into a loser? Or is there hope in the long run?

Morgans senior analyst Nick Harris tackled this question in a blog post this week.

Bottom line is fine, sales have slowed

The market punished Megaport on Tuesday as a result of its latest quarterly update.

But Harris thought the main figures weren’t a massive disaster.

“Headline EBITDA was above our and consensus expectations (US$ adjusted) with revenue broadly inline,” Harris said on the Morgans blog.

“Cash burn was higher than we expected due to higher cash expenses. Cash burn reduced but not as much as we had expected.”

That expenditure will improve, according to Harris. 

“FY24 guidance suggests cash burn will [halve] year-on-year and our maths suggests [a] drop by two-thirds as revenue grows from a combination of price rises and steady sales momentum.”

The sudden drop in stock price, according to Harris, was more due to “anaemic quarter-on-quarter growth” in sales of its Megaport Cloud Router and Megaport Virtual Edge products.

“MCRs & MVEs declined QoQ, which was attributed to customer proof of concepts completing and not yet being migrated from proof of concepts (tests) to, hopefully, live paying deals.”

Are Megaport shares a buy now?

So the main risk for investors considering buying the dip in Megaport shares is whether the declining sales momentum sticks around.

Harris does not think that this is the case, so would buy the tech stock.

“We think [declining sales] is short term and see value in Megaport for those with a higher risk profile.”

The big upwards share price catalyst will be “becoming free cash flow positive and accelerating sales in the medium term”.

The major financial indicators are heading in the right direction, he noted.

“From Q1 to Q2 FY23 revenue grew by 24%, gross profit grew by 41% and EBITDA grew by 114%,” said Harris.

“This is extremely impressive operating leverage. This trend should continue over the next 12 months as Megaport optimises and automates.”

The post Buy this ASX 200 tech stock that’s crashed 27% this week: expert appeared first on The Motley Fool Australia.

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More reading

• Here are the top 10 ASX 200 shares today
• 3 ASX 200 tech shares going gangbusters on Thursday
• Top brokers name 3 ASX shares to buy today
• Are Megaport shares mega cheap following Tuesday’s crash?
• 5 things to watch on the ASX 200 on Wednesday

Motley Fool contributor Tony Yoo has positions in Megaport. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended 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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