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Nearmap Ltd

I have fallen to the bottom of my giddy aunt’s (GA) Christmas list of favourite nephews and nieces after my last stock recommendation of buying Nearmap.

The old dear, sharp as a tack, loves nothing better than a market chat over English breakfast tea in fine bone china and a delectable slice of her orange tea cake.

But Nearmap disappointed and exceeded disappointment when immediately the stock tanked by a dollar on half yearly results. The stock fell out of the $1 billion market cap wunderkinds when it announced lowered estimates of 2020 annualised contract values (ACV) of $102-110 million, down from previous guidance of $116-120 million.

Nearmap currently is around $1.70 – far from its halcyon 2019 highs of $4 plus and last months $2.70 recommended long. My defence as I reached for second piece of orange cake, was we had purchased Nearmap well before its last run and captured most of its upside.

“Remember, you are only as good as your last trade,” she admonished me, as I brushed crumbs from my lap and received a lecture on how to drink tea properly. Sip don’t slurp!

Nearmap management GA reckoned had taken its eye off the ball in the past six months and Rob Newman, Nearmap CEO agreed with those sentiments. He said the fundamentals of the business were still strong, and in two years’ time this would be looked at merely as a blip.

Newman says the ACV downgrade related to four “uncontrollable” events for some of the company’s North American clients.

When I mentioned this, my GA, almost snorted into her tea, and replied “bollocks” in a most un-aunt way.

Nearmap has been growing at 35-40% year on year and growth like this strain management resources. Nearmap needs better executive boots on the ground, and perhaps a small amount of foresight could have avoided some of the downgrade.

A direct result, December customer churn jumped from 6% to just over 20%. No customers were lost to competitors and these were individual, unrelated internal events beyond NEA’s control.

One particularly worrying event is a spending shortfall from autonomous vehicle mapping clients.

Newman is quietly confident this will pick up following the hit from autonomous vehicle crashes.

Nearmap certainly had been priced on the promise of high growth, and now the issues are credibility, profitability and its rate of capex spending. Cash flow needs to improve and perhaps this might be the time for NEA to pause growth and consolidate the gains it has made. It wants to expand into the UK and Europe which will eat up a big chunk of the current $70 million of cash.

The profit announcement was the third negative announcement from the company, and some shareholders are questioning the company’s accounting treatment because it amortises rather than writes off image capture costs against cash flow. The company’s auditors consider this a legitimate way to expense these items.

This unexpected turbulence in NEA’s price does allow investors an entry point, where I think most of the risk is in the price. So GA is looking to double down on her NEA investment because she reckons the price is right to wait. But if Rob Newman’s confidence doesn’t match shareholder expectations, he will get an earful from a certain little old lady at the company’s next AGM.

A valid share price target for the stock is now around $2.80.

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