With Nearmap Ltd (ASX: NEA) shares up another 6% today on no announcement and up nearly 140% in the last six months, the question must be asked: Are Nearmap shares seriously overvalued?
About Nearmap
Nearmap is a leader of aerial imagery technology and location data, providing frequently-updated, high-resolution aerial imagery. It currently operates in Australia, New Zealand and the United States. It’s one of the ten largest aerial survey companies in the world by annual data collection volume. This Rask Media article explores Nearmap’s operations in more depth.
Recent Innovations
Nearmap shares have been on the rise recently for a number for reasons, one of which is the new 3D and AI technology they’ve implemented.
The ability to stream and export 3D imagery on demand will, according to Nearmap, fundamentally change industries like urban planning, architecture, construction and more.
Also noteworthy is that in April, Nearmap was added to the S&P/ASX 200 (INDEXASX: XJO), helping to boost the share price as the company comes into the sights of large investment funds and superannuation funds.
Valuation
Nearmap is a high-growth company. According to its 2019 first-half financial report, revenue increased 45% on the prior corresponding period. The company has forecast FY19 as its first year for breakeven cash flow excluding deployment of capital raise proceeds.
As the company is growing at such a high rate, cash flows may remain low or negative for some time as the company deploys large amounts of capital to take advantage of growth opportunities. This makes forecasting positive future cash flows particularly difficult, so a lot of assumptions need to be made to value the business.
Based on the 2018 Annual Report, the sales per share figure was roughly $0.14, meaning Nearmap now trades at a P/S ratio of approximately 28x, ignoring the capital raise which increased the number of shares.
Compare this to other growth shares like Altium Ltd (ASX: ALU) on a P/S ratio of 22.6x and it could look expensive. But other shares like Afterpay Touch Group Ltd (ASX: APT), or WiseTech Global Ltd (ASX: WTC) can make Nearmap look cheap.
Summary
Basic ratios suggest that Nearmap may be overvalued like Afterpay or WiseTech shares, but these ratios really mean very little. Nearmap is a great business with a lot of growth potential, but I’m not sure I’d be willing to buy at today’s levels.
At the current price, I’d be more comfortable investing in one of the business in the free report below.
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Disclaimer: At the time of writing, Max does not own shares in any of the companies mentioned.
