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Why shares of Nearmap Ltd could outperform the market in 2018

Shares in aerial mapping company Nearmap Ltd (ASX: NEA) have had a great start to 2018 with its shares up 5.9% to 63 cents on no news. The company saw a 31% rise in revenues to $41.1 million in FY17 as it continues to grow its subscription base and average revenue per subscription in Australia and in the U.S.

Nearmap sells its aerial imagery on a Software-as-a-Service (SaaS) basis to a diverse range of clients including construction businesses, government agencies, insurance providers, utilities and other commercial firms. The highly detailed visual and topographical content captured from Nearmap’s technology allows users to accurately survey and measure a location remotely which saves time and money on site visits.

In FY17, the company had $40 million in Annualised Contract Value (ACV) in Australia and projects this to grow by double digits in FY18. Australian based revenues in FY17 rose by 22% to $36.3 million, producing $21.8 million in free cash flow which enabled the company to fund its U.S. expansion.

U.S. market

In FY17, the company’s U.S. subscription base grew by 67% to 605 subscribers with ACV rising by 255% to US$5.3 million. Management has guided for ACV in the US to double in FY18. The potential in the U.S. market is evidenced by the average revenue per subscription of $US8,771 (A$11,173) being considerably higher than the company’s Australian equivalent of $5,540.

The company still has some way to go before its U.S. operations are cash neutral after losing $14.5 million in FY17. Pleasingly, U.S. revenues are thus far tracking ahead of the Australian equivalent at year 4 from the first year of capture.

Foolish takeaway

Oracle’s recent $1.6 billion takeover of Aconex Ltd (ASX: ACX)demonstrates the potential of the small cap Australian technology sector and the viability of the SaaS model after a successful international expansion.

After November 2016’s capital raising at 70 cents, Nearmap has $28 million in cash at balance sheet year end and at today’s prices has a market capitalization of $245 million. With the strong growth in ACV, I’d expect FY18 revenue to be over $50 million, which prices the company on a forward enterprise value to sales ratio of around 4.1. Attention will now be on Nearmap’s half yearly results which are scheduled to be announced next month. If the company can continue to gain traction in the lucrative U.S. market the stock could outperform the general market in 2018.

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Motley Fool Contributor Tim Katavic has no financial interest in any company mentioned. The Motley Fool Australia owns shares of and has recommended ACONEX FPO and 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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