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Is the Nearmap share price in the buy zone?

Following a strong 2019, Nearmap Ltd (ASX: NEA) was earmarked as an ASX stock that could well and truly outperform in 2020. Reality hit last week when the aerial imagery company reported its results for the first half of FY20.

The results which came in below expectations saw the Nearmap share price tank more than 23% at one stage before making a slight recovery. Despite the soft report and volatile share price, the company itself still has the fundamentals that could see it outperform in the long term.

How did Nearmap perform?

Nearmap is an aerial imagery company that has operations in Australia, New Zealand and the US. Regarded by analysts as best in its class, Nearmap provides digital images from sophisticated cameras mounted on light aircraft. Images are taken from different angles and combined to create high-resolution landscapes which are stored in an online library.

Last week, Nearmap provided the market with an update on its performance for the first half of FY20. The company reported that annualised contract value (ACV) grew 23% to $96.6 million for the period ended 31 December 2019 (1H FY20). Despite the impressive growth, Nearmap downgraded ACV expectations for the full year of FY20 to a range between $102 and $110 million. The revised guidance is around 10% lower than the initial guidance Nearmap provided last November for ACV which was in a range between $116 and $120 million.

Why the poor performance?

Some analysts labelled the revised guidance as the result of high churn risk. Churn is measured by the value of ACV subscriptions not renewed at the end of a subscription period. Nearmap saw churn in North America rise from 6.1% in the first half of FY19 to 20.6% in the first half of FY20. Nearmap validated the revised guidance was the result of a large partner cancelling its contract and downgrades to two contracts in the autonomous vehicle industry.  

Broker note

Brokerage firm Morgan Stanley recently released a note on Nearmap, retaining their overweight rating on the company. Analysts remain confident that competition will not impact severely on the long-term growth of Nearmap and view the pullback in the company’s share price as a potential buying opportunity.

However, despite retaining their rating on Nearmap, Morgans did drop their share price target for the company to $2.30. Analysts cited concern over higher than normal churn in the United States and slower growth in Australia as contributing factors.

Should you buy?

Nearmap is definitely on my radar as a potential buy for the long term. I think investors should give the Nearmap share price some time to consolidate and wait for positive price action before buying shares in the company.

There is an increase in competition within the aerial imaging sector, with the listing of Aerometrex Ltd (ASX: AMX) on the ASX late last year. However, I think Nearmap should continue to deliver solid growth and is well poised to take advantage of the global market opportunity.

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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. 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.

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