Megaport Ltd (ASX: MP1) shares had a stunning session on Friday.
The release of a surprisingly strong third-quarter update sent short sellers scrambling to the exits and the network services company's shares hurtling 41% higher to $5.63.
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Can Megaport shares keep climbing?
The good news for readers is that Megaport shares could have plenty of room to climb higher from current levels despite Friday's heroics.
According to a note out of Goldman Sachs, its analysts have responded to the update by reiterating their buy rating with a slightly trimmed price target of $8.10.
This price target suggests that Megaport's shares could rise by a further 44% over the next 12 months. Not bad considering the gains it made last week!
Why is Goldman bullish?
The note reveals that Goldman was impressed with Megaport's performance during the quarter. Particularly given its poor performance in the second quarter and the sudden departures of its CEO and CFO. The broker believes this bodes well for the future and suspects that the company will have sufficient capital to reach its free cash flow goals. It commented:
Following significant share price weakness around 2Q23 earnings and CEO/CFO departures, the positive 3Q23 result (financial + operating metrics) and introduction of stronger than expected FY23/24 EBITDA guidance improves our confidence in the outlook both in the short term (pricing impact & cost out execution) and medium term (MVE/MCR returning to strong growth), while reinforcing our view that MP1 will not need to raise capital to reach a sustainable FCF position.
Looking ahead, Goldman is looking for the company to build on this performance in the coming quarters. If it does, it expects it to help improve investor confidence. It adds:
Looking forward, MP1 now needs to deliver a number of consistent quarters of improved momentum, and show that its direct sales investment can accelerate growth from 2Q24 to continue rebuilding investor confidence. We remain positive that this can occur, given we believe in the structural growth drivers underpinning in MP1's growth outlook (cloud/multi-cloud/NaaS adoption) so retain our Buy rating, while raising FY24/25 EBITDA +7% to +4% given marginally lower revenues, offset by the greater cost out targets. Our 12m TP declines -1% to A$8.10, implying +44% upside.
