Loss making Megaport Ltd (ASX: MP1) has a market capitalisation of around $210 million and these facts alone are sufficient to make the stock an avoid for most investors. However, unlike many speculative investments Megaport has significant growing revenues so may be of interest to those with high risk tolerance.
Megaport describes itself as a "global leading provider of Elastic Interconnection services". Essentially this means that it uses clever software to streamline the internet connection between its customers' data centres and major cloud service providers such as Amazon, Microsoft and Google.
This enables its clients to ramp up their internet speed when using core cloud based software on an on-demand basis. Megaport likens the service to the power industry where large industrial electricity users often have dedicated connections to power stations which can be used to shortcut the grid when energy requirements are high.
The company boasts the likes of News Corp (ASX: NWS) and JB Hi-Fi Limited (ASX: JBH) as clients in Australia and since its IPO in late 2015 has expanded its network into North America and Europe.
Sales are growing rapidly, with annualised recurring revenues up from $2.6 million in December 2015 to $10.9 million in December 2016.
The company is well funded too, with cash on hand of $24.4 million at the end of 2016. This is just as well since the business is still losing money at the gross profit level. In other words, the amount it pays out to network and data centre suppliers exceeds the revenue it generates from its customers. Whilst the business made an undisclosed gross profit in the more mature Asia Pacific region in 2016, North American setup costs meant that gross margins were negative at the group level.
To be honest, I do not have the technical knowledge required to judge if Megaport is onto a winner with its "Elastic Interconnection" solution, but I take comfort from the fact it was founded by executive chairman Bevan Slattery. He has a good track record when it comes to spotting new trends in the telco/internet industry.
In 2002 Mr Slattery co-founded PIPE Networks which he subsequently sold to TPG for $373 million in 2009. PIPE owned the third-largest metropolitan fibre optic network in Australia at the time of the merger.
Foolish takeaway
I like the concept of Megaport's business but would want to see it generate some decent gross profits before I would consider buying shares. I would also need to understand the competitive landscape better as Megaport is targeting a large global market opportunity that is bound to attract other players.
