Many readers will be familiar with the transformation being wrought in the information technology space by cloud computing. Where previously an enterprise would own and maintain all of its own computing infrastructure on-premises, increasingly, businesses are coming to view computing as a non-core activity that is best consumed as a service.
If a third party can operate an efficient, scaled platform that offers the necessary back-end data storage, software and processing power on a flexible, “as needed” basis, then it makes sense for an enterprise to outsource to that third party and focus its own resources on more critical parts of its business model.
This logic has seen rapid growth of so-called public cloud computing providers, led by Amazon Web Services and Microsoft Azure, with the global cloud computing market now estimated to be in the region of $200 billion to US$300 billion p.a., growing at double digit rates, and expected to continue growing for many years to come.
As data and computing loads increasingly move from on-premises to the cloud, a corresponding need arises for networking capacity to transfer data from one place to another. To meet this need, enterprise users will typically contract with telecommunications companies and other parties to access the required networking equipment and fibre optic lines.
In recent years, Australian company, Megaport, has taken the approach of offering network connectivity to cloud providers in the same way that those public cloud providers offer computing capacity – flexibly, and as a service. Megaport has installed networking equipment (“Megaports”) in hundreds of data centres around the world and put in place a network linking together these Megaports and the major public cloud service providers. Via this platform, enterprises who would take advantage of the ease and flexibility of cloud computing can now access the associated network capacity in the same flexible way (Network as a Service, or NaaS), freeing them to focus resources on more critical parts of their business model.
It is still early days for the NaaS industry, but since launching in 2013, Megaport has moved to quickly build out a global footprint and has enjoyed very rapid growth in the take up of its services. Interestingly, it now appears to be the global leader in an interesting business with a very large growth opportunity in front of it.
Given it is early days, valuing Megaport is extremely challenging. However, assuming the cloud NaaS industry develops to be an order of magnitude smaller than the cloud computing market it serves, our analysis suggests that the opportunity in front of Megaport is huge, with the potential for very rapid compound growth to continue many years into the future.
Megaport could, of course, be overtaken in years ahead by aggressive competition, but today it has a leading position and enjoys scale benefits and first mover advantages. It has achieved an enviable position and if it is able to execute well enough to sustain this position, the upside from here could be quite something.
The Montgomery Funds and Montgomery Small Companies Fund own shares in Megaport. This article was prepared 02 July with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Megaport you should seek financial advice.