Nearmap declined around 40%, despite delivering what most companies would regard as stellar results (Credit: Nearmap)

Nearmap Ltd (ASX:NEA) almost tripled this year, hitting a high of $4.29 before selling off more than 40% in the subsequent period. Positive sentiment towards the company at the start of the year, backed by growth in the Australian business coming in above expectations, supported the rally. The market moved from a sum of parts valuation, where the US business was priced on a revenue multiple and the rest of the business was priced on an EBITDA multiple, to the whole business being valued on a revenue multiple. By agreeing to pay a certain multiple of revenue for the stock, investors are taking an educated bet on future profit margins, which they will generally only do for early stage businesses with particularly attractive growth opportunities.

The company specialises in mapping, aerial imaging and location data. The company takes detailed imagery of houses using satellites from space and will provide the most accurate data in the market. These precise measurements, for things like how high the roof of a house is, are particularly valuable for end users. A company installing solar panels can know what sized ladders to bring and send a high-quality rendering of how the end product will look to the property owner, without ever needing to visit the site prior to a quote being approved. The value this adds to clients explains the company’s growth, market dominance and ability to gain high market share.

What is particularly appealing about Nearmap is the prospect of monopoly pricing power. It’s main competitor, Eagleview, provides a pay-per-report subscription model, instead of the more profitable SAAS model that Nearmap employs. The company has penetrated less than 1% of it’s estimated addressable market in the US, explaining the market’s excitement around the company.

The big concern for Nearmap however is the valuation. The company trades at 16x FY19 Revenue, but this falls to under 10x revenue if guidance for an earnings beat materialises. While the market has been happy with the way the company has been executing this year, their loss was far bigger than consensus estimates. This caused fear within the market around further delays to monetisation of their US client base, which adds to the cold market reaction towards their preliminary report. While the 81% rise in operating cash flow is not to be sneezed at, the market is pricing the company on very high multiples. This means that it needs to continue to deliver record results or see a share price correction, as investors who bought on high expectations sell out.

 

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September 3, 2019