Why Did Megaport Drop 18% After Strong Results?

Megaport’s Strong Results Met With a Sharp Sell-Off 

Megaport (ASX:MP1) caught investors off guard this reporting season. Despite delivering strong results, its share price slid 18 percent in a single session. For a company riding the artificial intelligence boom and positioning itself as a leader in Network as a Service, that kind of drop was hard to ignore. 

At a market cap of around two billion dollars and trading on a lofty price, expectations for Megaport are sky high. That may explain why good numbers were not enough, as the market seemed to demand something closer to perfection. 

Investors are now left with a familiar dilemma:

Is this a moment of opportunity to buy into a long-term growth story, or is it a warning sign that sentiment has outpaced fundamentals? 

Understanding where Megaport truly stands in its growth journey will be critical, and the answer may reveal more about the future of cloud and connectivity than about one stock alone.

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Megaport Business explained

Megaport addresses a critical challenge for businesses moving deeper into artificial intelligence. Instead of investing heavily in their own hardware or building costly data centres, companies can use Megaport’s software-based platform to establish secure, high-speed connections in just minutes. 

This flexibility allows customers to link directly to leading cloud providers such as Amazon Web Services, Microsoft Azure, and Google Cloud, while also gaining access to more than one thousand data centres worldwide. The result is a seamless way to move and manage data at scale. 

Megaport generates revenue through recurring subscription fees, with a customer base that spans cloud service providers, large enterprises, financial institutions, and government agencies. For these organisations, the value lies in speed, reliability, and the ability to scale connectivity as their needs evolve.

Megaport Delivers Strong Growth but Doubles Down on Reinvestment

Revenue Profile

Revenue grew 16 percent to $227 million, up from $195 million last year, while annual recurring revenue from its subscription model increased 20 percent. A key highlight was the expansion of larger customers, those contributing more than $100,000 in annual recurring revenue, which rose 18 percent to 629.

Profitability Profile

On profitability, gross profit climbed 18 percent to $162 million with margins steady at 71 percent. This level of profitability is typical for a software-driven platform where overheads remain relatively low. Operating margins, however, contracted by 2 percentage points as the company deliberately increased investment in sales and engineering to support future growth.

Capital Allocation

Capital allocation during the year reflected this focus on expansion. Megaport invested $32.6 million, or 15 percent of revenue, into 115 new data centres, network upgrades, and new market entries in Brazil and Italy. Research and development spend remained at 6 percent of revenue, but headcount grew 37 percent, showing a clear commitment to scaling innovation capacity. The company is clearly prioritising reinvestment in both physical infrastructure and product development as it pursues long-term growth.

Investors takeaway 

Megaport is clearly on a strong growth path, and with interest rates easing in Australia, the domestic market provides an additional tailwind. That said, the company does not trade at a bargain. Investors are paying a premium for its growth profile, which means timing becomes an important part of the investment decision. For now, Megaport is worth keeping on a watchlist, as opportunities to enter at more attractive levels are likely to present themselves over time.

Disclosure: Pitt Street Research / Stocks Down Under directors own MP1 shares.