It's easy to create a bearish argument for shares in aerial imaging provider Nearmap Ltd (ASX: NEA). The management changes, the surprise capital raising, not to mention the volatile share price that hit 77 cents in 2014, fell to 33 cents in 2015, hit 89 cents in 2016, and is now back at 53 cents – down 12% on where it was 3 years ago.
But I believe there are some very good reasons to stick with this up-and-coming small cap:
First, revenues are growing. So far in 2017 (not shown above) Nearmap continues to grow, with the company reporting a further $3 million increase in Annualised Contract Value (ACV). Nearmap can grow its sales both by adding new customers, and selling more to existing customers, and with an estimated 15% market share in Australia, and less than 1% in the US, there appears to be ample space for further growth.
Second, although currently unprofitable due to heavy spending on the US expansion, Nearmap is potentially very profitable with gross margins consistently above 80%. This means that of every $1 earned in sales, 80 cents drops to the bottom line as profit or, in this case, for further investment in expansion.
Revenue growth combined with this high level of profitability could see the company become very profitable if it is able to grow enough. I haven't seen data on customer 'lifespan' so far, but if Nearmap saves its customers time and money (which is the whole point of its software), it would suggest that customers are likely to stick around. This could mean that Nearmap is able to generate multiple years of sales from each new customer added.
Finally, although the business is unprofitable, it is well funded with $28 million in cash, enough to sustain 3-4 years or so of losses at today's rates. This gives investors some security without having to worry about being diluted by a capital raising in the near term. For all these reasons, I think it would be a mistake to sell Nearmap Ltd (ASX:NEA) today.
