Small Caps | May 19 2026
This story features MEGAPORT LIMITED.
For more info SHARE ANALYSIS: MP1
The company is included in ASX200, ASX300, ALL-ORDS and ALL-TECH
Megaport's AI positioning strengthens following to contract wins by recently acquired infrastructure-as-a-service provider Latitude.
- Acquisition of Latitude already leading to significant contracts
- Capex requirement comes first, with earnings forecasts boosted post FY26
- Capital intensity shifts focus to execution from demand validation
- Contracts seen as meaningful de-risking event for Latitude
By Mark Woodruff
Customers who use network-as-a-service provider Megaport ((MP1)) to move workloads seamlessly between data centres and the cloud may now also access the company’s infrastructure-as-a-service offering after the acquisition of Latitude.sh in November last year.
Opening the door to AI infrastructure exposure and the hyper-growth market of inference, the addition of Latitude is already bearing significant fruit.
Megaport management last week announced major contract wins with total contract value (TCV) of US$183m and around US$65m in annual recurring revenue (ARR) across the 2.9 years of weighted average tenure of the agreements for compute, network and storage.
Morgan Stanley believes this scale is significant relative to Megaport’s existing earnings base and materially improves contracted revenue visibility.
The announcement is seen as a meaningful de-risking event for Latitude, given investor concerns around that business’s capital intensity.
Canaccord Genuity notes the two new contracted customers are US-based technology providers operating AI applications and inference workloads, with one already an existing Megaport customer.
The broker estimates -US$101m of capex and a two-year EBITDA payback period imply a gross margin approaching 78% across the contracts.
Compute and storage are lower-churn, higher-gross-margin products, Macquarie points out, with churn rates of just -2%-6%, supporting stronger customer lifetime value (LTV) and improving the quality and durability of recurring revenue.
While UBS notes full-life returns are difficult to estimate given the mix of GPU, CPU and storage assets, this broker believes a potential 45% return remains highly attractive even if generated solely over the initial two-to-three-year contract term.
Incremental capex will be funded by cash reserves and a newly-upsized $150m debt facility.
Serving over 1,150 customers, Latitude provides high-performance, optimised compute services with CPU and GPU infrastructure in 20 key markets across 10 countries.
This coverage by Latitude complements Megaport’s existing 1,100 enabled locations in 30 countries for its network-as-a-service offering, allowing customers via a port to either connect between or to a cloud services provider (CSP), or to connect to any service connected to the Megaport network.
This core offering provides elastic interconnection services on a pay-as-you-go basis, allowing fast, secure, and scalable connectivity.
Latitude contract wins
Macquarie explains Megaport requires these new contracts to generate attractive returns over the initial term, with potential upside to internal rates of return above 20% if contracts are extended or assets are later redeployed into the broader compute pool.
Ord Minnett estimates additional organic growth of US$10m-US$15m from pricing and utilisation improvements tied to the newly announced Latitude contracts.
This potential ourcome is complemented by US$8m from a prior contract announced in April and a partial-year contribution from the new US$65m annualised contracts.
Combined, Ord Minnett expects FY27 compute revenue to exceed US$130m, equivalent to more than $180m at current exchange rates.
The new Latitude contracts are described as materially strengthening Megaport’s medium-term earnings outlook, supporting meaningful upgrades to forecasts beyond FY26.
Latitude uses both NVIDIA and AMD chips, mitigating supply risk, Macquarie highlights.
This broker also notes Megaport is not directly competing with neocloud providers for AI Factory GPU supply, as the rack densities required for these deployments are materially lower than those associated with high-density AI applications.
In mid-April, Citi noted a surge in GPU rental demand, with Latitude’s GPUs sold out and pricing increasing, suggesting upside risk at the time to Megaport’s annual recurring revenue (ARR) and FY27 forecasts.
Morgan Stanley notes AI customers are not simply purchasing GPUs, but the broader infrastructure stack required to deploy applications at scale, including CPU, storage and network connectivity.
Ord Minnett comments Latitude appears to be tracking strongly against acquisition growth targets.
Contingent consideration payments tied to the acquisition are linked to revenue milestones of US$74m in 2026 and US$115m in 2027.
The original Latitude acquisition announcement noted the maximum number of shares to be issued under the earnout would be 14.6m, with any shortfall in value to be paid in cash.
Despite higher capital requirements, the broker suggests Megaport remains well funded, supported by a strong net cash position and expanded debt facilities, providing flexibility to fund earn-outs, future growth initiatives and additional investment opportunities.
Capex requirement
An important feature of Compute-as-a-Service is the close relationship between upfront equipment investment and the subsequent cash flows generated over the contract term, Canaccord explains.
While this provides potential for materially higher earnings growth, it also carries a significant upfront capital expenditure requirement.
ARR will be recognised incrementally as hardware is deployed and becomes operational.
It’s anticipated the full contribution will be added on run-rate basis by the end of the first half of FY27.
Management noted the contracts will require -$140m of capex for high-performance NVIDIA GPUs, compute, network, and storage hardware, assuming the equipment for the announced contracts be delivered prior to financial year end.
Morgan Stanley believes the key debate has shifted from demand validation to execution, utilisation and returns on invested capital.
Management does not speculate on large deals, Macquarie highlights, requiring signed take-or-pay contracts before purchasing servers.
Morgan Stanley notes CPU infrastructure is a more competitive and less differentiated market than network connectivity, meaning the key issue for Megaport extends beyond demand to its ability to efficiently deploy capacity, maintain utilisation and generate attractive returns on invested capital.
Outlook
With compute ARR building materially faster than previously modelled, Canaccord increases its FY27 group revenue and earnings forecasts for Megaport by 10% and 20%, respectively, driven entirely by the Compute segment while Networking forecasts remain unchanged.
This broker believes the market is pricing in ongoing investment into, and earnings growth from, the Compute business to meet what appears to be very robust demand.
Macquarie believes the Compute business enhances Megaport’s core network offering while delivering attractive unit economics.
At around 11x FY27 earnings, this broker argues the current Megaport share price implies an 18% sales compound annual growth rate (CAGR) that appears too conservative given the company’s growth opportunity.
Stockbroker Morgans only updated its thoughts and modeling this morning and the over-arching views are just as positive and supportive as the above quoted peers. Morgans sees improving margins, among many more positives, leading the way to a share price re-rating.
Megaport’s updated price target at Morgans is now $15.50, up from $13.50 prior, alongside an unchanged Buy rating. This leaves Citi (Buy, target $15) as the laggard that hasn’t yet updated. Citi analysts have been issuing bullish commentary prior to the contracts announcement.
FNArena’s consensus price target for Megaport has now risen to $16.07 suggesting 24.9% upside to the share price, even after the rally that has followed the news. Megaport shares closed at $12.87 yesterday.
Four of the daily monitored brokers carry Buy or equivalent ratings, while Morgan Stanley has a Hold-equivalent rating and Ord Minnett is on Accumulate, positioned between Buy and Hold on its ratings scale.
Outside of daily coverage, Canaccord Genuity retains a Buy rating and raises its target to $15.85 from $14.30.
Jarden has been quiet for a while; its latest price target sat at $17.63, alongside a Buy rating.
Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided.
FNArena is proud about its track record and past achievements: Ten Years On
Click to view our Glossary of Financial Terms
CHARTS
For more info SHARE ANALYSIS: MP1 - MEGAPORT LIMITED
