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Goldman Sachs slaps buy rating on Nearmap shares

The Nearmap Ltd (ASX: NEA) share price has been a disappointing performer in 2020.

Since the start of the year the aerial imagery technology and location data company’s shares have tumbled 23% lower.

Why is the Nearmap share price down 23% in 2020?

Investors have been selling the company’s shares following the release of a disappointing trading update which included a surprise guidance downgrade.

Instead of annualised contract value (ACV) of $116 million to $120 million, it now expects its ACV to be in the range of $102 million to $110 million in FY 2020.

This downgrade has been caused by the loss of a major contract and two churn/downgrade events.

Is this a buying opportunity?

I think this share price pullback is a buying opportunity for investors that are willing to make a long-term and patient investment in its shares.

After all, the company has a high quality product offering and is still only scratching at the surface of its significant market opportunity.

I’m not alone in believing that this selloff is a buying opportunity. According to a note out of Goldman Sachs, its analysts have initiated coverage on Nearmap with a buy rating and $2.25 price target.

The broker notes that its recent downgrade indicates near term challenges scaling in the United States.

However, it believes it is worth overlooking this and focusing on its large and growing opportunity in a highly fragmented market and its advantages over the competition.

Goldman Sachs said: “NEA has estimated its market opportunity across its 4 geographies to be A$2.9bn (Australia, New Zealand, USA and Canada). This represents a material growth opportunity for NEA, with our forecast 3yr revenue CAGR of 22% (to FY22E) implying NEA’s share of this potential addressable opportunity will grow from 2.7% in FY19 to 4.9% in FY22E.”

The broker feels the company is well-positioned to win a decent share of this market due to its fragmented nature and the quality of its platform.

In respect to the latter, Goldman said: “NEA has the following strengths: (1) high quality image capture, (2) market leading frequency of capture, and (3) substantial investment made to provide oblique and 3D imagery and AI/ML driven analytical capability at scale which few competitors currently replicate. We do not believe these advantages will be eroded over our forecast period noting NEA has spent over A$100mn in development and image capture capex and opex between FY17-FY19 and we estimate another A$110mn will be spent over our forecast period.”

Overall, I agree with Goldman Sachs on these points and feel it could be well-worth snapping up shares this month.

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Motley Fool contributor James Mickleboro 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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