The Nearmap Ltd (ASX: NEA) share price has seen strong growth over the years, flying an incredible 147% higher in the first half of 2019.
However, since then, Nearmap shares been hit savagely, returning to levels seen at the beginning of last year. Does this present a great buying opportunity?
What does Nearmap do?
For those of you not familiar, Nearmap is an Australian aerial imagery and location data company that provides geospatial map technology for businesses, enterprises and government customers across Australia, New Zealand, the US, and Canada.
Clever niche in the market
Nearmap captures images of a particular location approximately six times a year. In comparison, Google Maps typically only updates its images every couple of years or so.
This, therefore, provides more beneficial information to niche customers who typically rely on accurate and up-to-date map information. These customers operate in industries such as building and construction, architecture and engineering, government, insurance, real estate, roofing and solar.
Nearmap has also managed to obtain a strong niche in the market through its online software platform. Nearmap aggregates images onto its online platform and charges an ongoing subscription, rather than selling individual images to customers.
This typically leads to high amounts of recurring revenue and more predictable cash flows. Additionally, Nearmap’s revenue model translates to high-profit margins and helps the company to scale relatively quickly.
In FY19, Nearmap recorded revenue of around $77.6 million up 45% on the prior year. This is a very small fraction of the global aerial imagery market, estimated to be worth over $7 billion. As such, Nearmap has enormous potential and scope to grow further.
North American opportunity
I believe North America, in particular, offers huge growth opportunities for Nearmap. The company entered the US market in 2015 and is growing rapidly.
Currently, profit margins are significantly lower in North America than in Australia. However, as subscriptions grow in the US, margins in this region are likely to increase over time as costs are allocated across a larger subscriber base.
Disappointing market update and guidance release
At the end of last month, Nearmap provided a disappointing update to the market which sent shares tumbling around 30% on the day.
In the update, Nearmap reported that during the first half of FY20, its annualised contract value (ACV) grew by 23% on the prior corresponding period (pcp) to $96.6 million. The company also reported a 31% increase in unaudited statutory revenue to $46.4 million.
Although this appeared to be a reasonably solid result, it fell short of management’s expectations. As a result, Nearmap downgraded its full-year ACV guidance to between $102 million to $110 million, compared to previous guidance $116 million to $120 million.
The key triggers for this downgrade were the loss of a large contract and two churn/downgrade events in relation to a slowdown in mapping for the autonomous vehicle industry.
Despite the disappointing market update, I believe the fundamentals of Nearmap remain very solid.
Since reaching an all-time high of $4.29 in mid-June last year, the Nearmap share price has fallen more than 50%. As a result, I believe that now could be a great opportunity to snap up this top quality ASX tech share at a very reasonable price.
A lot will be riding on the release of Nearmap’s half-year results on 19 February 2020. However, I feel that most of the downside risk in Nearmap’s share price has already been factored in to its current share price.
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Motley Fool contributor Phil Harpur owns shares of Nearmap Ltd. 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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