If you sell this promising small-cap now, you might regret it

It’s easy to create a bearish argument for shares in aerial imaging provider Nearmap Ltd (ASX: NEA). The management changes, the surprise capital raising, not to mention the volatile share price that hit 77 cents in 2014, fell to 33 cents in 2015, hit 89 cents in 2016, and is now back at 53 cents – down 12% on where it was 3 years ago.

But I believe there are some very good reasons to stick with this up-and-coming small cap:

source: 2016 company report

First, revenues are growing. So far in 2017 (not shown above) Nearmap continues to grow, with the company reporting a further $3 million increase in Annualised Contract Value (ACV). Nearmap can grow its sales both by adding new customers, and selling more to existing customers, and with an estimated 15% market share in Australia, and less than 1% in the US, there appears to be ample space for further growth.

Second, although currently unprofitable due to heavy spending on the US expansion, Nearmap is potentially very profitable with gross margins consistently above 80%. This means that of every $1 earned in sales, 80 cents drops to the bottom line as profit or, in this case, for further investment in expansion.

Revenue growth combined with this high level of profitability could see the company become very profitable if it is able to grow enough. I haven’t seen data on customer ‘lifespan’ so far, but if Nearmap saves its customers time and money (which is the whole point of its software), it would suggest that customers are likely to stick around. This could mean that Nearmap is able to generate multiple years of sales from each new customer added.

Finally, although the business is unprofitable, it is well funded with $28 million in cash, enough to sustain 3-4 years or so of losses at today’s rates. This gives investors some security without having to worry about being diluted by a capital raising in the near term. For all these reasons, I think it would be a mistake to sell Nearmap Ltd (ASX:NEA) today.

Not convinced? Here are 3 attractive blue chip shares you could buy instead:

Top 3 ASX Blue Chips To Buy In 2017

For many, blue chip stocks means stability, profitability and regular dividends, often fully franked..

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool's in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool's Top 3 Blue Chip Stocks for 2017."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

If you're expecting to see the likes of Commonwealth Bank, Telstra and Wesfarmers shares on this list, you'll be sorely disappointed. Not only are their dividends growing at a snail's pace, their profits are under pressure too due to the increasing competitive environment.

The contrast to these "new breed" blue chips couldn't be greater... especially the very real prospect of significant share price gains, something that's looking less likely from the usual blue chip suspects.

The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand - and how quickly the share prices of these companies moves - we may be forced to remove this report.

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Motley Fool contributor Sean O'Neill owns shares of Nearmap Ltd. The Motley Fool Australia owns shares of Nearmap Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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