Nearmap Flying High In The USA
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It’s time for me to revert back to individual stock opportunities. The past few weeks we have been discussing the global macro picture and some of the clues that other markets and instruments have been giving as clues to the future behaviour of equities. Sometimes though despite the broader market trends there are standout individual companies and one of these that excites us once again is Nearmap (NEA) which is now expanding into the US and gaining a lot of traction. Hence the share price improvement.
Nearmap uses low flying planes to map out in extreme detail aerial shots of cities and geographical location which they then sell to Governments, construction companies, real estate agents, etc that wish to use these maps to better plan for change. The high level detail, coverage and regularity of their mapping sets them aside from the competition.
The Fact that the NEA share price has been moving in a completely different correlation to the broader market is in itself a strong indication that investors are looking at the company for its own merits and not just an instrument within an index. Even more remarkable is that this has occurred despite the volatility and broad macro fears over Greece, Puerto Ricco and China.
Let’s look at the share price first. One of my favourite technical setups is that where a strong underlying trend has been in place for several months (preferably years) and there has been some consolidation of late. The longer-term uptrend typically reflects improving fundamentals, profitability, market share and broad based expansion. The consolidation then reflects the fact that these improvements are sustainable. Too often we see “pumps and dumps” stocks that show promise, experience a lot of hype but within a few months deflate back to their original starting levels due to a lack of real underlying profitability or execution on their targets (whatever that may be).
Following this consolidation if the outlook begins to improve – such as expansion into a new geographical area or new product – the share price will begin to gather positive momentum once more. Because the company has already been “proven” in investors eye the next re-rating can often be just as large as the first rally or even larger. In the case of NEA the next opportunity of tackling the US is even larger than dominating the local market.
Throughout 2015 a large round base has been building on NEA which is on the verge of breaking higher through 65c. In late 2014 the stock enjoyed a 33% increase after a similar consolidation was formed, however, the market was unwilling to push the stock significantly higher without further confirmation of initial success in the US. That information has been coming through from the company and this improving sentiment is being reflected in the share price gathering ground.
A similar move to that in late 2014 would register a targets initially into the $90/$1.00 range however when we stand back and look at the longer-term weekly chart and consider some financial metrics levels well beyond $1.00 could easily be seen. The initial rally in the share price on its successful execution in Australia saw the stock power from 5c to 60c – a time which first grabbed our attention to the company. There is nothing to say that with the size of the US market and the unique offering NEA provides that the same scale of opportunity is available once more.
The company currently generates on our forecasts approximately annualized $40 million in 2016 for its Australian business. Based on early rollout in the US we can see similar revenue metrics in the US heading into 2017. Therefore, revenue for 2017 could be in the $85 million (low end) to $100 million (high end) range and operating with a gross margin of 80/90% - the current market cap of $229 million is certainly cheap. With $21 million in the bank and no debt, NEA represents a compelling growth opportunity and one of the few local success stories to make it big in the USA.
Greg is the Head of Proprietary Trading at Gleneagle Securities and has over 20 years of experience as proprietary trader and high level strategist for the major investment banks including Citigroup, Bankers Trust and Macquarie Bank. He has been involved across all asset classes including commodities, bonds, currencies and equities right across the globe.
After a 10-year career within the comforts of the large investment banks and research firms he branched out on his own to form his own proprietary trading firm successfully building the business into a multi-million dollar trading operation that turned over a billion dollars a year. This same team now runs the proprietary trading desk at Global Prime, risking their own money in line with the firm's and client's capital.
Greg has appeared on CNBC, Channel 9 - Business Sunday programme, a guest columnist for the Australian Financial Review, a regular author for Personal Investor, Wealth Creator and Shares magazine and is the former Treasurer of the Australian Technical Analysts Association.