This week, Nearmap Ltd (ASX: NEA) shares edged higher after the aerial imaging business revealed the launch of its latest products, including Nearmap 3D and the ‘beta’ version of its Artificial Intelligence (AI) product. Both products have the potential to further solidify Nearmap’s industry leadership position.
But let’s take a step back. What exactly does Nearmap do?
Google maps on steroids
Founded in 2007 in Western Australia, Nearmap has grown from a small start-up to an ASX 200 (INDEXASX: XJO) tech-giant with a market capitalisation of over $1.4 billion.
Nearmap is all about aerial imagery, but with images captured using sophisticated plane-mounted cameras, it is able to deliver these more frequently, at higher resolution and at oblique angles. Further, images are updated within days of capture and come with a rich, industry-specific toolset.
Customers come from a wide range of industries, including insurance, government, construction, solar, utilities and more. A key value proposition is that it saves clients costly and time-consuming site visits.
What’s To Love?
Nearmap has a great product, but what matters is that it’s supported by some fairly juicy economics.
Sales have been growing at an accelerating rate, the business is debt free with $80m in cash, and the business delivered positive operating cash flow as of the most recent half (HY2019). The business enjoys a high level of recurring revenue, >90% customer retention, and has a high degree of operating leverage. Each new customer is, in principle, able to be serviced with very little incremental cost. So as sales grow, net margins should expand.
A critical pillar of the growth story is its expansion into the USA. Unlike most Aussie companies, Nearmap is experiencing some real success here and the opportunity remains vast. The company estimates the total addressable market to grow to US$4.5b by 2025.
Last, but not least, Nearmap enjoys some major competitive advantages. As an early mover in this space, it has a deeper repository of images and data. That not only offers a greater value proposition to customers but gives it a real advantage in developing new products. The new AI product is a perfect case in point…
Rise Of The Machines
Nearmap’s new AI feature enables its system to detect and measure change. Like most AI advancements, such capabilities require large data-sets to train the system, so new entrants — without such resources — are at a significant disadvantage. Indeed, management boast they have a “mult-year advantage” over their closest competitors.
Also, as the company increases its market lead, and captures more customers, increasing operating cash flows are able to support increased R&D efforts. This creates a virtuous loop whereby superior technical capabilities enable greater market share, which delivers increasing profitability and underpins further R&D, which extends technical superiority…and so on.
Nearmap 3D, which enables customers to visualise and measure cities in 3D from any direction, is another example of the company’s increasing lead on competitors.
Is It Time To Buy?
With shares up more than three-fold in the past 12-months, investors are right to wonder if they’ve missed the boat. And shareholders may even contemplate selling down as valuation concerns start to weigh. After all, despite a pull-back from recent highs, shares in Nearmap are trading on a price-to-sales ratio of almost 20x.
Although the business is likely to break-even on a cash basis this year, it’s expected to show another statutory loss for FY2019.
Then again, sales at the most recent half grew by 45% and Nearmap should be profitable in the following financial year. With around $80m in cash, there’s plenty of dry powder to support operations through to profitability, and earnings have the potential to explode as the business moves past the break-even inflection point.
Ranked #11 on Strawman, the Nearmap share price is still below the community’s consensus valuation.
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