Guide:
- A handful of high-quality AI infrastructure stocks that have been overlooked
- Australian businesses with a North American market label
- Profits have reversed and a new CEO will take over
- Opinion: The stock price is reasonable and attractive for investment
NVIDIA killed crazy, and the recent 40% rise in the US stock market is well known, directly knocking on the door of the "trillion club". Although there are no such high-quality AI chip stocks in the Australian stock market, there are still a few high-quality AI infrastructure stocks.
At present, AI infrastructure is mainly divided into two categories, one is software infrastructure and the other is hardware infrastructure. AI software infrastructure refers to the software tools and frameworks needed to build and maintain AI systems, and Databricks, a cloud data warehouse company, is a typical example.
The corresponding AI hardware infrastructure refers to the hardware equipment and architecture required to run AI software. Chip manufacturer NVIDIA is a typical representative, this type of company has extremely high technical barriers, in the market segment of various chips have oligopoly.
Another type of hardware infrastructure is data center operators represented by Equinix. With the global data volume increasing at an annual rate of 23%, and the advent of the wave of enterprise digitalization, data centers have become a rigid need for many enterprises.
In a previous article, we introduced Australian data center leader NextDC (ASX:NXT) as such a company. This type of asset in Australia is actually loved by large institutional investors, and after the article was released, the stock followed the AI boom in the past month, rising by about 13%!
However, the protagonist of this article is not a traditional hardware infrastructure company like NXT, which does not provide any computing power services. Brisbane, Australia-based Megaport Limited (ASX:MP1) is a global software-defined networking (SDN) company. By providing cloud ecosystem management software, it helps customers deal with the information interconnection between multiple cloud service providers.
It can be predicted that as modern enterprises become more and more dependent on cloud services, the market demand for the services provided by such enterprises will continue to increase. Although it does not have a strong technical moat like NVIDIA, as a relatively new and practical software service company, MP1 has also run a relatively leading position in its own segment.
The company's stock price has also risen 35% in the past month with this wave of AI!
A handful of Australian businesses with a North American market label
From the common application scenarios, it was also mentioned in the article introducing NextDC that when a company reaches a certain level, the company will subscribe to the business of multiple cloud service providers, whether for risk control considerations or the demand for the product characteristics of each cloud service provider.
But when customers subscribe to services like Amazon AWS, Microsoft Azure, and Google Cloud at the same time, some common problems arise. For example, because there is no direct channel for mutual communication between cloud platforms, when a large amount of data is sent and received to each other, it is easy to have some data port tasks that are too dense, so that they cannot be sent and received, resulting in high latency and even packet loss.
Through the software-defined network (SDN) platform, MP1 only needs customers to dock one interface, which can realize "multi-cloud interconnection" to cloud service providers (including local private clouds) in multiple regions and platforms.
In this way, enterprises can reduce the overhead on upgrading and managing their IT systems, achieve faster cloud expansion, and faster network connection and data transmission will greatly help to provide stable service and user experience.
Although the technology is useful, will Australian companies be subject to the small size of the market in Australia itself? The answer is no.
It is understood that the company has successfully achieved global business expansion, and the Asia-Pacific region currently accounts for only 30% of the company's revenue, and the North American market, which is the most technologically developed, has become the company's main market. And in the 21st and 22nd financial years, the North American market also grew the fastest in revenue, with a revenue contribution of more than 50%, which directly proves that the company has completely jumped out of the Australian market and has become one of the few companies in the ASX stock market with the North American market label.
The company's founder and interim CEO Bevan Slattery is also a legendary Australian entrepreneur who started in 1998 and has since founded 9 companies, including listed companies NextDC and Megaport, and in 2011, he entered the list of young rich people with a net worth of about $103 million. Fortune will publish a business story article next week detailing the serial entrepreneur in Australia's tech sector, so stay tuned.
Image: Bevan Slattery, founder and interim CEO of Megaport. Source: AFR
Profits are turning around, and a new CEO is about to take over
From the company's latest financial report for the third quarter of fiscal year 23, the company's current financial data is very good, not only in the revenue level compared with last year has a 38% gratifying increase, but also in the subscription and other repeat income has an increase of 48%, indicating that the current company's revenue growth is very benign.
In terms of profit margin, the company had been burning money for a long time before, but from FY22, the company was gradually affected by the scale effect, and from the fourth quarter of '22, EBITDA turned historically positive, and the revenue in this quarter was 5 million Australian dollars in EBITDA profit, an increase of 108% year-on-year.
However, the figures in Megaport's earnings report are not perfect either, most notably in the number of new customers. In the first three quarters of fiscal 2023, the number of new customers was 168, down from 256 in the same period last year.
From this point, we can see that although MP1's products are recognized by existing customers, the sales progress to new customers is still a little weak. In addition to the impact of the macro environment, we can attribute the problem to the lack of new sales direction in the company's sales team.
It is worth noting that the company is currently in a transition period of CEO change, the original CEO Vincent English suddenly left in early May, Bevan Slattery as the original founder took over as interim CEO, and began to look for a new CEO who can drive MP1 growth.
The latest news shows that the new CEO has been finalized as Michael Reid, a senior executive of the US network and cloud services giant Cisco Cisco, who previously worked at Cisco for 15 years and has rich global sales experience. Between 2019-2021, he led a sales team of 130 people to help Cisco complete $300 million in annual IoT product sales.
After that, Michael Reid was assigned by Cisco to lead its newly acquired network monitoring SaaS company, ThousandEyes, as chief revenue officer and increase the subsidiary's annual recurring revenue (ARR) to $1 billion. The new CEO is not only proud but also professional, and the Australian Finance and Investment Research team believes that the addition of Michael Reid will be a big help for the company's strong growth.
Forward-looking: Successful price increase, strong expectations
In addition to the release of this quarterly report, the company also gave another surprising news - the company raised the price of core products.
It is understood that the company's full-year EBITDA expectation after the price increase is 18-20 million Australian dollars, more than double the market expectation of 9 million Australian dollars. In the 2024 financial year forecast, the company's guidance EBITDA is 41-46 million Australian dollars, much higher than the market expectation of 30 million Australian dollars.
In the view of the Australian Finance Investment Institute, the confidence behind the company's ability to give such a figure comes from the extremely low customer turnover rate after the price increase. The users of MP1 products are generally large companies that mainly realize data interaction in multiple regions of the world. Typical customers are global video conferencing software Zoom, Australian travel agency giant Flight Centre, communication service provider Vodafone, manufacturing giant Boeing and General Electric.
Megaport currently has data connections across 423 data centers around the world, half of which are in North America, to better serve these large customers who can bring long-term cash flow to the company.
And if these big customers want to deactivate MP1's products, they need to consider their conversion costs. Because the current industry in which MP1 is located is still relatively new, its competitors often cover less areas than MP1. If customers want to switch to cheaper service providers, they will need to bear the loss of service downtime for a period of time and the loss of network connection speed in some areas, which is very large for the current average size of these customers.
In the Australian market, we can see that the most recent case of service downtime is a network connection incident during the Tyro Payments epidemic. As an Australian payment platform company, with a market value of only about 600 million Australian dollars, the company's stock price fell by more than 20% due to a three-week downtime accident.
Therefore, for global giant enterprises, it will be more difficult to bear the losses caused by such situations, so the Australian financial investment research team has reason to speculate that Megaport's customer loss pressure in the past two years will not be too high.
Australian Finance Investment Research Viewpoint
Since the company has not yet entered a profitable state, if you want to look at the valuation aspect, you can only compare MP1 at the price-to-sales ratio. As shown in the chart below, the company's price-to-sales ratio has averaged 25 over the past 5 years, with only a lower price-to-sales ratio of 9 in 2022, and the current price-to-sales ratio is only 11 after the stock price skyrocketed. Therefore, the Australian Finance Investment Research team believes that the company's stock price is still in a reasonable state and has certain investment attractiveness.
Overall, MP1 business grew strongly and is expected to be free cash flow positive in fiscal 2024. What we need to watch now is whether the company will be able to meet strong EBITDA guidance levels on schedule and whether the new CEO can smoothly transition and make a difference. If all goes well with the company's sales under the leadership of the new CEO, MP1 will be a very unique technology stock in the Australian ASX market.
Written by Yang Hu Yang
Edited by Serena Changs
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