The Nearmap Ltd (ASX: NEA) share price is up 225% over just the last year, but may have room to run far higher if the analysts on the sell-side desk at Morgan Stanley are on the money.
Multiple news wires are reporting that Morgan Stanley has ramped its valuation higher partly on the back of its optimism that the aerial mapping business will be able to expand successfully into the U.S. and Canada.
For example now Nearmap has grown annualised contract value in the U.S. to US$17.6 million as at December 31 2018 it’s de-risked as it looks like the U.S. business is more likely than not to turn profitable one day. However, this is no secret and now reflected in the $3.25 share price.
Nearmap is a business I regularly recommended to readers as a good bet when it traded below 50 cents and already exhibited signs that its U.S. business had potential to turn profitable.
I even made it my top stock market pick for Melbourne Cup Day in 2017 and recommended it at 40 cents per share back in November 2015 when asking is Nearmap set to soar?
And you won’t catch me recommending loss-making companies like Nearmap unless I have a strong conviction that the risk / reward bet is worth taking.
For example the only other loss-making company I own on the ASX is Xero Limited (ASX: XRO), which coincidentally hit a record share price high of $52.70 this morning and has returned around 40% over the past year.
Generally though I wouldn’t suggest buying unprofitable companies unless you’re an experienced private investors as the vast majority of loss makers will turn into capital sinkholes where you never generate anything but losses on the your investment.
Of course it’s easy to look clever with the benefit of hindsight, but today’s investors will want to know whether Nearmap will hit Morgan Stanley’s share price target in 12 months’ time?
A couple of points to note. While sell-side analysts can often be correct in their analysis a “12 month share price target” shouldn’t mean much to serious investors focused on the long term.
In reality “price targets’ exist to encourage ‘mum and dad’ investors to trade as a target significantly above today’s price provides the selling point to trade, hence the name ‘sell-side’ research.
It’s these sell side research functions that publicise research that are almost always appendaged to brokerages that earn lucrative fees by executing trades on behalf of retail clients.
So if you understand sell-side research can vary anywhere between brilliant and atrocious you’ll learn not to place too much emphasis on the short term share price targets constantly adjusted to reflect minor business developments.
Moreover, not following the ‘sell side consensus crowd’ will also improve your chances of beating the market assuming that is your investing aim.
Over the long term Nearmap still has a bright future, but the rampant buying of the stock including because it’s soon to enter the S&P/ ASX200 (ASX: XJO) may have seen the share price get a little ahead of itself.
Nearmap may also provide some kind of quarterly trading update or news on its progress in Canada by the middle of May, which would give the market, rather than sentiment, a better chance to value the business. This in turn could prove a reasonable entry point for anyone buying into this scalable growth story.
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Tom Richardson owns shares of Nearmap Ltd. and Xero.
You can find Tom on Twitter @tommyr345
The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia owns shares of and has recommended 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 Scott Phillips.