Nearmap Stock: A Pure-Play on Aerial Imaging
In 2004, Blockbuster video had reached its peak with 9,000 brick-and-mortar stores worldwide and a new store opening every 17 hours. Today, there’s just one left in Bend Oregon – the last Blockbuster store. If you were an investor in Blockbuster at that time, what metrics would you have been watching to make sure you exited your position before the entire company imploded? Revenue growth might have been one good metric.
Trying to avoid being a bag holder for the next Blockbuster is why we’re always focused on growth companies having consistent revenue growth. Today, we’re going to talk about a company with consistent revenue growth that competes in the geospatial intelligence space.
About Nearmap Stock
We first came across Nearmap Limited (NEA.AX) in our recent piece on 7 Geospatial Intelligence Companies for P&C Insurance. They’re a $523 million company that’s publicly traded on the Australian Securities Exchange. Unlike most geospatial intelligence firms we write about, Nearmap collects their imagery using airplanes that are enabled with its own patented camera systems and processing software. That came as quite a surprise to us. Are satellite images not granular enough for all use cases? Not according to Nearmap.
Let’s talk about the importance of resolution in geospatial imagery.
Geospatial Image Resolution
Pixel resolution refers to the actual distance on the ground that each pixel represents in an image. For example, six-inch (15.24 cm) pixel resolution means that each pixel in the image covers six inches on the ground. The higher the imagery resolution, the greater the visible detail within the photograph. Clearly, a six-inch (15.24 cm) resolution is much better than a one-foot (30.48 cm) resolution.
Nearmap Vertical imagery consistently offers 2.2-inch to 3-inch resolution images which can be updated up to 6X per year. Below you can see 2021 revenues for the various segments they service along with the growth of each compared to 2020.
|Subscription Revenue Segments||2021||2020||Growth|
|Architecture, Construction & Engineering||26.95||26.54||+2%|
|Insurance & Property||15.38||15.52||-1%|
The inability to grow solar seems concerning given just how much new solar is being deployed, while the entrance of roofing raises some eyebrows (more on why in a bit).
The first concern we had with the business was around how they’re able to compete with satellite image providers. Sure, resolution, but just how much demand is there for high-resolution aerial imagery? At least based on overall revenue growth, quite a bit.
Revenue growth appears on track, but some other metrics raise questions about the resilience of the business in the face of market turmoil. For example, customer loyalty took a dump during the first half of 2020 for reasons we can only assume were related to The Rona. Gross retention dipped to 88% for one quarter before returning to 94%. One thing this company does well is to use metrics to measure various aspects of their business.
The biggest questions we have surround the size of the opportunity and if high-quality aerial imagery will eventually be cannibalized by satellite imagery.
Aerial Imagery vs. Satellites
High-resolution geospatial imagery might be compared to high-fidelity headphones. Most people don’t need high-resolution audio hardware to listen to music. Just how big is the total addressable market (TAM) for high-resolution aerial imagery? It’s difficult to know, but we’re mainly interested in new use cases that involve blue ocean TAM. While companies like Planet estimate the TAM for geospatial imagery at (checks notes) over $100 billion, there’s a fraction of that which can’t be addressed by satellites because they don’t provide enough resolution.
Just over a year ago, Maxar announced 5.9-inch (15 cm) high definition which they described as “the highest clarity from commercial satellite imagery.” They’re accomplishing this by using AI algorithms that improve the clarity of images. It’s not meant to replace aerial imagery but to complement it by supplementing “regions that are too remote to fly aircraft and to “support aerial mapping missions that have been affected by the pandemic.” Still, there are things you can do with aerial imagery that you can’t do with satellite imagery – like 3D images. Below you can see an example where Nearmap imagery can be used to measure a building.
But Nearmap is far from being the only company dabbling in aerial imagery.
At least some competitors of Nearmap include the following names.
- Vexcel Imaging – acquired by Microsoft Corporation in 2006 and contributed as a subsidiary to the success of Microsoft’s Bing Maps web service and mapping platform. Currently selling aerial imaging hardware. Acquired a fleet of airplanes and other imaging assets from risk analytics company Verisk last year who came on board as an investor.
- Hexagon – Founded in 2014, Hexagon is a global leader in sensor, software, and autonomous solutions with 21,000 employees in 50 countries and net sales of approximately $4.3 billion. It’s a publicly traded firm we might take a closer look at later.
- EagleView – merged with aerial imagery provider Pictometry International in 2013 and was acquired by private equity firm Vista Equity Partners in June 2015. Filed a complaint against Nearmap this past May alleging eight patent infringements.
The lawsuit this year by EagleView is of particular interest given it concerns Nearmap’s entrance into the roofing market. Nearmap shares crashed more than -23% when it was disclosed that the patent infringement claims were related to roof reports. Only this year has Nearmap started to generate their own roofing revenues which accounted for 30% of their entire revenue growth. Nearmap is looking to North America for its future growth and firms that already occupy that space aren’t going to give up market share without a fight. Below you can see how most of Nearmap’s new subscribers are coming from North America (dark blue) while growth in Australia & New Zealand (lighter blue) is marginally improving.
We were also surprised to see just how little money these subscriptions cost (relatively speaking). The average subscriber contributes $7,717 USD per year, though the number is consistently rising over time.
Should You Invest in Nearmap?
You should invest in any stock that you have strong convictions about provided your future ex-wife approves. As for us, Nearmap’s market capitalization of $532 million doesn’t meet our minimum market cap requirement of $1 billion. Regarding valuation, it’s not overpriced according to our simple valuation ratio:
- Market cap / annualized revenues
736 / 117.44 = 6
The bull case would be that an increasing number of use cases will arise for high-definition aerial imagery and that Nearmap is positioned to capture them. How much of an opportunity this represents is unknown though. It’s also conceivable that a company like Maxar or Planet could supplement their satellite datasets with aerial datasets. While Maxar is balls deep in debt ($2 billion company with $2 billion debt), Planet is said to have $600 million in cash lying around after their SPAC debut.
The bear thesis is that aerial imaging doesn’t have a big enough market to offer the sort of growth that might make Nearmap a compelling investment. Stealing market share from competitors is a lot tougher than going after blue ocean TAM. EagleView developed their roofing algorithms a decade ago at which time they were priced at $20 to $80 each and used by around 50,000 roofers and almost every single large insurance company. Four years later in 2015, they had cleared $100 million in revenues and counted 24 of the 25 largest insurance companies in the country, along with 30,000 construction companies and contractors, as customers. What must their business look like now? If Nearmap plans to grow their business in North America, they have at least one formidable competitor to contend with, one who is now dragging them into the court system black hole.
To avoid a fate like that of Blockbuster, Nearmap – and all other aerial imaging companies – need to maintain their revenue growth above all else to show investors they’re able to capture market share and grow their business. Aerial imaging is a lot more mature than satellite imaging, and it seems likely that much of their business will be displaced by companies like Planet and Maxar. Perhaps if there’s some consolidation in the aerial imaging space, what emerges might be worth a look. That is, if they can demonstrate some meaningfully large blue ocean TAM exists to help fuel future growth.
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