The Motley Fool

Is the Nearmap share price in the buy zone?

Australian aerial imagery company Nearmap Ltd (ASX: NEA) released its preliminary results to the market earlier this month. The company announced that it anticipated record portfolio growth of 36% to $90.2 million for FY19, as well as full year cash flow in line with guidance.

What happened after Nearmap’s announcement?

Normally, you would expect strong results like these to send a positive signal to the market, but since the announcement on 12 July Nearmap’s share price has actually slid almost 16% lower, extending losses going back to mid-June. It might leave some of its longer-term shareholders scratching their heads, wondering why one of the best performing stocks in their portfolios seems to be consistently languishing in the red.

The market’s subdued reaction to the preliminary results most likely stems from Nearmap’s announced change in accounting policy. There have been two changes, one in relation to the new leasing accounting standard and another regarding the period over which Nearmap chooses to amortise its capture costs.

The new leasing accounting standard, AASB 16, removes the distinction between finance and operating leases and requires that companies recognise their future lease obligations as a liability on their balance sheets. The rationale behind the change is that it will provide a more accurate representation of a company’s true financial position, and it will most likely affect all companies to some extent.

The change in amortisation period, however, is unique to Nearmap, and some investors may already be looking ahead to the financial impacts this will have in FY20. Reducing the length of the amortisation period will result in a higher amortisation expense, particularly in the first year of implementation. This will dampen annual growth in Nearmap’s bottom line.

However, reducing the amortisation period is traditionally viewed as a more conservative accounting approach. It means a company recognises more of its expenses earlier, instead of deferring them over a longer timeframe. It’s sort of equivalent to paying off your debts earlier, which reduces risk exposure.

It does mean there is going to be some short-term pain in exchange for long-term gain, which scares off the day-traders. But for investors with a longer-time frame, there is a lot to like about Nearmap’s result, and the current dip in its share price could present a great buying opportunity. The company is cementing its market leading position in Australia and New Zealand, while growing its presence in North America and it also recently began commercial sales of its first artificial intelligence content.

Foolish takeaway

My first impression is that Nearmap has been overly punished by short-term investors for what is essentially a pretty positive results announcement. I put Nearmap alongside other market-leading tech growth stocks like Altium Limited (ASX:ALU) and WiseTech Global Ltd (ASX:WTC), and I expect it to continue to offer great growth opportunities for investors with a longer timeframe.

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Rhys Brock owns shares of WiseTech Global, Altium and Nearpmap Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of WiseTech Global. The Motley Fool Australia owns shares of and has recommended Nearmap Ltd. The Motley Fool Australia owns shares of Altium. 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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