Megaport (ASX.MP1) shares jumped nearly 10% as it announced around $1 billion in new artificial intelligence infrastructure contracts. Guidance for revenue was raised by 13% for fiscal 2027, and EBITDA margin guidance was 4 percentage points higher.

Why it matters: The company’s new compute business, which rents out compute to AI companies, is clearly on a tear. It has announced $2.3 billion in total contract value over the past six months, including new wins, which include contracts with new customers and existing customers.

  • The contracts require an additional $500 million in capital expenditure in fiscal 2027, which will be paid mostly with customer prepayments. The company expects the hardware to be fully deployed by fourth-quarter fiscal 2027, which is faster than usual.
  • The scramble for compute is clearly still ongoing, as evidenced by customers willing to front most of the bill for the infrastructure they then intend to rent. Each contract provides committed revenue for the contract term of around four years.

The bottom line: We increase our fair value estimate for no-moat Megaport by 9% to $18.50, reflecting the new contract wins, as well as reported improved momentum in the legacy networking business. Shares screen as overvalued.

  • Although we think Megaport will generate attractive returns from its compute business, we think the scramble for compute will eventually calm down and rationalize, as supply comes online. We therefore don’t want to extrapolate current momentum too far.

Megaport networking business continues to be on a tear

We expect Megaport’s strategy in the near term will revolve around helping AI companies address the global shortage of compute through its new compute offerings. To that end, Megaport can leverage its existing presence in over 1,100 data centers to install small amounts of GPU capacity per center, which is then tied together with its networking technology to create capacity of sufficient scale to be interesting to AI companies.

In the medium term, we expect the industry for its original networking technology to shake out, following years of intensifying competition. We expect Megaport, as the scaled provider, to come out as the winner.

Bulls Say

  • Megaport is one of the leading companies in a lucrative, nascent industry.
  • Megaport’s strong net revenue retention implies solid latent revenue and profitability growth.
  • Megaport’s compute business is a beneficiary of the current global scramble for compute.

Bears Say

  • Megaport’s products and services are not protected from competition by an economic moat. We expect eventual commoditization and price-based competition, albeit among a relatively small number of providers.
  • Gross customer growth has been slowing, and customer acquisition costs have been growing rapidly.
  • Customer churn has been increasing and is relatively high compared with the software-as-a-service industry.

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