Aerial mapping company Nearmap Ltd (ASX: NEA) has had a bumpy ride. Shares have gone from 44 cents, to 94 cents, and back to 50 cents in the course of 12 short months.
A surprise capital raising, some executive departures, and increased fear over competition in the USA has seen shares sold off heavily from their recent highs. Back at $0.50 – where they've traded since late 2013 – are Nearmap shares an opportunity today?
The company looks a bit 'ehhh' based on its valuation metrics. First, it is unprofitable. Second, it's priced at around 5x sales, which is not overly high compared to some other small-caps. Third, it's priced at 30 times its forecast 2017 earnings before interest, tax, depreciation, and amortisation (EBITDA) – which sounds pretty outrageous, with a common multiple for listed companies being 8-10 times.
Despite this, I feel that Nearmap is an opportunity at today's prices. There are several key reasons for that assertion.
First is that the company has a retention rate of more than 90%. As it adds customers, more than 9/10ths of them stick around for more than one year. Thus the company pays to acquire them once, but can earn multiple years of sales from them, driving earnings higher in subsequent years as new customers are won.
Second, a significant chunk of Nearmap's growth comes from selling more services to existing customers. Customers are acquired once, but buy more services from Nearmap after acquisition – so the company gets more mileage out of each customer.
Third, but perhaps most important, is that Nearmap adds considerable value for customers. It saves time and reduces costs in terms of site visits, allows better planning, and increases productivity for customers. This also adds some resilience to competition – if you're using a solution that meets all your needs and saves you more than you spend on it, where's the incentive to switch? 85% of surveyed users agree that not using Nearmap would have an impact on their business.
Fourth, Nearmap has the potential to become much larger over time. Even replicating the company's Australian success in the USA would justify today's prices, and the US market is around 7x larger. 30X EBITDA is not expensive if you (hypothetically) knew for sure that the business would become many times larger.
It's important to remember that Nearmap is unprofitable, and as a small company is more vulnerable to competition. It's a higher risk investment and not suitable for everyone. However, I feel that it is good value today and have previously purchased shares myself at current prices.
