The Motley Fool

Is now the time to stock up on Nearmap Ltd shares?

I haven’t been deploying much capital in the last few weeks, because I don’t have a great deal of cash in the bank, but I have to admit there’s one little company that I’m considering buying more shares of.

That company is Nearmap Ltd (ASX: NEA), a $142 million company that provides aerial footage for use by property developers, real estate agents, solar installers and town planners.

At a glance, Nearmap might appear to be competing directly with Google Inc, but that isn’t really the case. Nearmap provides much clearer and closer images than does Google Maps. This is extremely important. When I worked for a solar developer a few years ago, we never used Google Maps because the photographs are not even close to a direct bird’s eye view. That makes it impossible to get even a vaguely accurate read on the actual space available to install panels, or make even vaguely accurate estimates of how you would run the cables to those panels from the grid.

Given I was using the platform at the time, I do feel silly for not buying Nearmap shares when they were trading at around 4 cents!

Nearmap has only just started to turn a profit and made just under $800,000 in the first half of 2014. Assuming it grows profits 50% half on half – more than possible in my opinion – then it would make about $2 million in FY 2014. That would put the company on a Price to Earnings ratio of over 70!

However, with earnings starting from such a low base, and revenue rising faster than the costs (of existing services), the company may soon prove its doubters wrong. That’s because once the images are available online, most of the costs are paid for. Indeed, the company already covers over 85% of Australia’s population, and has recently taken steps to commercialise these images further by creating specific offerings for solar developers and real estate agents. A significant proportion of the costs incurred in order to offer these services have already been covered by the company. As new users sign up (and start paying) the company will likely see the addition of substantial sticky and recurring revenue – the best kind.

In any event,  the company’s technology is an extremely useful tool for rooftop solar development and (I suspect) real-estate agents. Although the former is slowing significantly in Australia, our real-estate market is growing strongly. An entrance into the US market could be particularly lucrative, as they are continuing to install rooftop solar and their real estate market is gradually recovering.

The company’s expansion into the US will no doubt put a dampener on profits in the short term – you have to spend money before you start making money in a new market. However, the possibility of cornering the best segments of the US market for frequently updated high resolution aerial imagery is tantalising to say the least.

Although I've bought a half-sized position in Nearmap, my concern is that the company is already priced for very substantial growth - it certainly isn't under the radar anymore. Slightly more cautious investors may prefer this highly profitable business with a decent dividend and strong growth prospects.

This little gem of a company has grown earnings per share for five years in a row, pays a strong dividend. Personally, I'm surprised it's still this cheap, and I doubt the opportunity will persist after the annual results are released. Indeed, the share price is up about 6% since one director bought shares recently.

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Motley Fool contributor Claude Walker (@claudedwalker) owns shares in Nearmap Limited. Disclosure is important, so good on you for reading this far.

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