Megaport Ltd (ASX: MP1) and NEXTDC Ltd (ASX: NXT) are popular ASX tech plays on internet infrastructure. Both companies were co-founded by Bevan Slattery, one of Australia’s most prominent tech founders. Which of these two ASX tech shares is the better buy?
Who is Megaport?
Megaport was founded in 2013 and tackles internet infrastructure in an interesting way which the company calls scalable and ‘elastic’. Megaport allows its customers to access ‘elastic interconnection services that align with cloud-based models’. Essentially, what that means is they aggregate internet infrastructure, cloud platforms, and data centres into one scalable interface where the customer can control everything.
Megaport recently reported 2% quarter-on-quarter growth, with year-on-year revenue growth of 44%. The company also reported quarter-on-quarter customer growth of 7% to 1,980 customers. Megaport is still operating cashflow negative with total outflows in the most recent quarter of $8.6 million.
Megaport has equipment installed in over 385 data centres, creating a physical network that connects over 680 data centres globally from where Megaport runs its services.
Who is NEXTDC?
NEXTDC was founded in 2010 and is Australia’s largest data centre operator. It runs a fairly traditional data centre approach compared to Megaport. NEXTDC owns, builds and operates its data centres, where it then sells the data centre capacity to customers. These customers include big cloud providers like Google (NASDAQ: GOOGL) and Amazon (NASDAQ: AMZN) as well as smaller businesses who require data centres.
NEXTDC has multiple data centres across Australia in Melbourne, Sydney, Brisbane, Perth and Canberra and has more data centres continually in the pipeline.
In FY20, NEXTDC reported year-on-year revenue growth of 14% to $205.2 million. The company added 20 megawatts of data centre capacity in the year and is currently selling 89% of total data centre capacity. NEXTDC reported an after-tax loss of $18.7 million, compared to a $9.8 million loss the year prior.
Which share would I buy?
Investors can often confuse Megaport and NEXTDC and think they are competitors, however, the companies are actually mutually beneficial to each other.
NEXTDC provides the raw physical data centres that Megaport uses to provide a scalable and elastic cloud infrastructure to the end customer. NEXTDC’s customers include Google and Amazon, and Megaport is a customer of Google and Amazon’s services. There is a virtuous cycle with these two companies.
As mentioned, Bevan Slattery is the co-founder of both companies and placed them in the market to be complementary rather than competitive.
Both Megaport and NEXTDC have seen their share prices fall from their yearly highs, by 23.9% and 15.9% respectively, to today’s prices. I see both companies having complementary long-term structural growth, as the need for data centre capacity and cloud services increases over time. I would buy both companies today, but start with Megaport due to the larger correction in its share price.
