The tech company thriving as pandemic drives thirst for data
In years gone past equity indices were largely driven by old economy sectors. Macquarie Bank outlines that during the period from 2001 to 2010, 95% of average yearly returns were delivered by what we would describe as old economy or old world businesses and sectors.
Looking at the last decade however and the picture is somewhat different. Old economy sectors have accounted for less than 40% of index returns, whereas new economy sectors such as software and healthcare have been responsible for over 60% of index returns.
According to statistics provided by the Macquarie research team statistics, the average index weight of new economy from 2001 to 2010 was less than 5% in China and 37% in the US. Today the figures are closer to 50% in China and 60% in the US.
One particular OECD study highlighted the productivity of the top 5% of firms in any industry is now growing four to five times faster than the productivity achieved by some of the laggards.
These days the share of the top 1% continued to steadily climb over the last two decades, with around 40%-45% of today's EBITDA delivered by the top 1% of profit generators. In essence, an increasing proportion of the winnings are going to a decreasing proportion of companies within industries.
In a world of disinflation, as well as a low, volatile, and unpredictable growth outlook, quality businesses able to generate sustainable growth have become increasingly more valuable. Nowhere is this theme more obvious than on the ASX with the WAAAX (Wisetech, Altium, Afterpay, Appen and Xero) stocks whose performance over the last five years has dwarfed even that of the FAANGMs (Facebook, Apple, Amazon, Netflix and Google and Microsoft) as growth staved local investors herd into a limited number of high growth names.
One business that we believe is in a strong position to capture the vast benefits from a large and growing market is Megaport.
Megaport: what they do
Megaport is a provider of elasticity connectivity and network services, operating under a Network as a Service (NaaS) business model. The company prides itself on offering the world's first elastic SDN-based interconnection fabric, which accelerates connection between customers and data centres.
Such technology can be analogised to that of the role of a roundabout: a roundabout allows drivers to efficiently change directions and quickly access different roads instead of driving to the end of one road, then turning to get to the other. Likewise, Megaport allows businesses to swiftly access multiple cloud databases - the likes of Amazon Web Services, Google Cloud Platform, IBM Cloud, Oracle Cloud, Salesforce and SAP - through a single platform. Except, unlike a roundabout, Megaport enables access to cloud databases regardless of the business' geographical location.
This is extremely important in an environment where many multinational corporations have several business operations across several countries and use several cloud databases depending on the location and business - Megaport effectively streamlines the communication by allowing data stored in different cloud servers and countries to be accessed universally on a single platform.
Megaport provides a unique payment system to cloud and data centres on a pay as you go basis in terms of capacity, speed, pricing and contract length, rather that licencing or subscription fees. The intrinsic value of Megaport is strengthened by its wealth of some 1842 customers, which include Adobe, BHP, Blizzard Entertainment, FedEx, ING, Major League Baseball, Tesla and Zoom.
Pandemic drives thirst for data
Even in the wake of the global pandemic, Megaport has continued to demonstrate strong performance and growth as the new workplace norm of working from home and international flight restrictions forced both domestic and multinational businesses to use cloud storage and service and consequently use intermediary technology provided by Megaport.
Another significant feature of Megaport, perhaps as compelling as its technology, is its Founder and Chairman Bevan Slattery. Slattery is recognised as a serial entrepreneur, with his extensive experience in the IT and telecommunications industry spanning across 20 years and nine companies he has founded.
Most notably, Slattery founded PIPE Networks, a telecommunications company sold to TPG Telecom, and NEXTDC, an Australian powerhouse in the data centre business. At Medallion, we are heavily encouraged by Slattery's expertise in IT and his ability to build companies that provide modern, innovative solutions to modern, technological problems.
Megaport delivered their full year results in August and the figures confirmed the continued shift towards Megaports offerings. Overall revenue grew 66% to $58 million, with the largest contributor being the North American segment at $26.3m which expanded by a very strong 94% over the year. The number of installed data centres, total number of ports and most importantly customer numbers grew across Asia Pacific, North America and Europe, all contributing to a 57% increase in monthly recurring revenues from $3.6m to $5.7m.
Management have confirmed COVID-19 impacts have not been significant and at Medallion we actually see COVID-19 as being more of a catalyst to speed up the shift towards Megaport's services as the cloud computing and data centre demand continues to grow.
Future look bright
Megaport is undoubtedly a promising company that offers an integral technology solution to businesses. With the advent of COVID-19, the demonstrated importance of cloud storage and services has accelerated Megaport's growth and thus we expect sustained growth in the future.
With the global cloud database market estimated to grow to $24.8 billion USD by 2025, we are strongly reassured by the combination of Megaport's technology and personnel that will propel the company into a global market with great potential.
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