Megaport (ASX:MP1) is expected to win its share of global demand for graphics processing units as a service (GPUaaS) due to its competitive advantage of distributing GPUs across multiple data centers and connecting them through the Megaport fabric, Jefferies said in a Wednesday note.
The equity research firm said its has greater conviction in the company's Latitude.sh business and the longevity in global demand for GPUaaS following a deep analysis of the neocloud market.
Jefferies has upgraded its fiscal 2028 earnings before interest, taxes, depreciation, and amortization forecast for Megaport by 20% to reflect higher utilization of chips in the GPU pool. But there is upside potential to the forecast if the chips are still in demand after an expected life of five years.
The investment firm assumes that Megaport will spend AU$200 million to AU$300 million per year to keep adding new chips to the pool.
However, it acknowledged potential counterparty risks with Latitude's unnamed customers for fixed-term contracts, with the GPU pool also presenting contract length risk and exposure to spot GPU rental rates. While this may limit lenders' appetite to fund the projects, the company might be able to tap the debt market rather than rely on equity as it scales its Compute division.
Jefferies maintained a buy rating on Megaport while raising the price target to AU$22.80 from AU$19.
The company's shares rose past 3% in recent Thursday trade.