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Up 400% in 5 years: Can Nearmap Ltd repeat the trick?

First of all in writing this article I’d like to acknowledge former Fool Mike King who passed away from cancer late last year and encouraged myself and others to buy Nearmap shares many years ago. Mike was a brilliant investor, but more importantly a kind man who gave up a lot of time to share his knowledge with younger investors and in particular his enthusiasm for the Nearmap business…..Thanks, Mike.

Nearmap is an aerial imagery company that sells its images to the local government sector (planners, civil agencies, etc) solar panel industry, construction sector, roofers, and landscape gardeners among others in the pubic and private sectors.

Over the past five years its share price is up nearly 5x (or 400%) from 35 cents to $1.74 today, but thinking you’ve ‘missed the boat’ on this company’s march higher may be an expensive mistake.

Let’s take a look at seven quick reasons why this stock could go higher.

  • Competitive position – Historically this has been considered Nearmap’s Achilles Heel, with the likes of Google Maps, drones and satellites all potentially disrupting its aerial imagery business model in quick time. Admittedly disruption remains a risk, but it should be noted that Nearmap’s growing data set and unique technology (3D + oblique imagery) give it a moderate competitive advantage in the specialist sector in which it operates.
  • Attractive business model –  Nearmap is a software-as-a-service (SaaS) business and boasts the attractive economic traits of recurring revenues, relatively fixed operating costs, and high gross profit margins. This means profits should grow faster than revenues if the business develops to plan.
  • Growth – you’re not going to get a growing share price anywhere without growth and in FY 2018 Nearmap grew its annualised contract value (ACV) 41% to $66.2 million, with a two-year compound growth rate of 35%. Moreover, thanks to its expansion into the U.S, revenue growth is now accelerating under its sales-driven boss Patrick Quigley. It goes without saying that the U.S. market alone is a massive opportunity.
  • Balance sheet – The group has a cash balance of $17.5 million and posted a cash outflow of $3.2 million for the six months ending June 30, 2018. It expects to reach cash flow break even this financial year. In effect cash inflows of $26.7 million from Australian operations are already funding the $22.7 million cash outflow Nearmap logged in the U.S. in FY 2018 as it invested for growth.
  • Market Opportunity – Nearmap is only bringing in US$12.9 million in ACV from the U.S. and whatever the differing estimates of the size of its addressable market in the U.S. it’s clear the sky is pretty much the limit for it in terms of addressable markets and growth.
  • Valuation – even after its white hot share price rise to $1.73, Nearmap is trading on an enterprise value to trailing sales ratio of around 11.8x according to my calculations ($635m / $53.6m). This is on the expensive side in my opinion, but it’s actually still cheaper than many of its SaaS peers in Australia such as WiseTech Global Ltd (ASX: WTC), Pro Medicus Limited (ASX: PME) and Xero Limited (ASX: XRO), or some of the other hot U.S. SaaS businesses. Admittedly, Nearmap’s business model isn’t as strong as some of the aforementioned, but investors are compensated by a cheaper valuation and the fact that Nearmap is coming off a much smaller base which provides room for larger returns.
  • Management – I mentioned the head of U.S. sales before in Patrick Quigley who appears an excellent salesman, while current CEO Rob Newman has built a stronger culture than his predecessor. Newman has also managed the capital requirements of the business pretty well in my opinion.

Clearly buying Nearmap shares at today’s valuation is a risky business given it just posted a heavy loss and operates in a fast-changing technological environment.

However, I wouldn’t be surprised to see the shares above $3 by the end of 2020 if sales pick up steam in the U.S. and that might not be the end of the gains for investors who hang onto this business for the long term.

It’s not just Nearmap that might shoot-the-lights out in the years ahead…

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Motley Fool writer Tom Richardson owns shares of Nearmap Ltd., Pro Medicus Ltd., and Xero.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Pro Medicus Ltd. The Motley Fool Australia owns shares of and has recommended Nearmap Ltd. and Pro Medicus Ltd. The Motley Fool Australia owns shares of WiseTech Global and Xero. 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 Scott Phillips.

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