The S&P/ASX 200 Index (ASX: XJO) is up around 25% from its March lows. Nearmap Ltd (ASX: NEA), however has far outpaced the index, increasing by more than 125% over the same period. So are Nearmap shares still a buy at their current price?

Nearmap at a glance

Nearmap is an aerial imagery company which uses a subscription as a service model. It provides imagery which is much higher in resolution than satellite imagery and shows changes over time. It has a multi-year advantage over its closest competitors with a profitable Australia and New Zealand (ANZ) segment as well as a fast growing North America (NA) segment. The NA segment also includes Nearmap’s newest market addition, Canada.

Supplementing the imagery, Nearmap’s software provides a range of product features including orthogonal (2D) imagery, oblique cardinal direction imagery and 3D online and AI content. Its customer base is diverse, as shown below, with the product’s primary appeal being the cost and time savings delivered through reduced reliance on site visits.

Data Source: Nearmap 1H FY20 analyst pack. Chart by author.

The market opportunity

Nearmap has a number of leavers to pull for growth. By expanding into new markets, growing its average revenue per subscription (ARPS), increasing gross margins and of course by growing its number of subscriptions. It appears there is a huge runaway potential.

The growth Nearmap is experiencing in its NA segment has accelerated past that of its more mature ANZ market. The NA portfolio offers a denser and larger market with an ARPS around double that of ANZ. However, the NA segment is not yet profitable since the company is still investing strongly there for future growth. Consequently, this means the company’s current gross margin is only 17% for its NA segment. Compare this to the ANZ segment which delivered a gross margin of 88% for 1H20.

Nearmap’s share price now

Nearmap’s share price began dropping lower mid last year and was also heavily sold off prior to the market crash after updating its guidance. In addition, along with most growth shares, it was again significantly sold off during the coronavirus-led market crash. This left it sitting almost 80% lower within 12 months. Putting the recent 125% rise in perspective, it would still need to gain 120% to reach last year’s high. 

With so many events contributing to Nearmap’s share price decline, its tough to decipher just how much of this fall has been justified. Pleasingly, the current trading conditions appear not to be materially impacting Nearmap. The company is also continuing to invest in growth initiatives. 

In addition to annual contract value growth and segment performance, I will be looking to see a reduction in churn when Nearmap next updates the market. This has historically been low but recently doubled after the company lost a couple of significant customers in the autonomous vehicle industry. Nearmap has noted, however, potential future upside as the industry recovers.

Foolish takeaway

I like Nearmap shares and have been an owner for a number of years, holding through the crazy ride it has been of late. I believe in the company’s future and can see Nearmap’s NA segment following the same path its profitable ANZ segment took. Not to mention the potential for continued global growth Nearmap has cited. Think Singapore, the UK, Asia and Europe. Who knows where this ASX 200 tech could be in 5 or 10 years. I would be happy being a buyer today, provided you have the stomach to hold on and find out.

More reading

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• 3 timeless investing lessons from 2020 (so far!)
• Leading brokers name 3 ASX 200 shares to sell today
• The ASX 200 just hit an 11-week high. Here are 3 reasons we might be in overvalued territory
• What ASX investors can do before 30 June to save tax

Motley Fool contributor Michael Tonon owns shares of Nearmap Ltd. The Motley Fool Australia owns shares of and has recommended Nearmap Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Up over 100% in 2 months. Are Nearmap shares still a buy at current prices? appeared first on Motley Fool Australia.

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I have tried a lot of different approaches to picking good shares to invest in over the last ten years. From buying shares in small-cap growth companies to ‘bargain’ commodity producers.

The most successful approach I’ve found when picking shares has actually been one of the simplest: looking for companies with strong economic moats.

What is an ‘economic moat’?

An ‘economic moat’ is another name for a competitive advantage. It is a feature that is hard to replicate which protects a company’s earnings from the onslaught of competition. Just like a moat protects a castle.

Companies with economic moats can be an investors’ best friend. By being insulated from competition companies, they are able to generate above-average returns on capital. By reinvesting that cash, these companies can compound and grow dramatically over time. 

Many of the best-performing ASX-listed companies have strong economic moats. If we pick these companies as a core part of our portfolio, we stand a good chance of earning better returns.

The 4 types of economic moat

In his book ‘The Little Book That Builds Wealth’ author Pat Dorsey outlines four categories of economic moat to look for when picking a company to invest in:

• Intangible assets
• Customer switching costs
• The network effect
• Cost advantages

Intangible assets can include brands and patents. Blood product company CSL Limited (ASX: CSL) is an example of a company which, through years of research and acquisitions, has created a valuable portfolio of patents and product licences.

Accounting platform Xero Limited (ASX: XRO) is an example of a company with high customer switching costs. Because there is a lot of time and hassle involved with changing to a new accounting system, the cost to switch can be prohibitive.

Despite the rise of Linkedin, jobs platform Seek Limited (ASX: SEK) has proved to be a robust example of the network effect where growing additional users creates more value for other users.

While JB Hi-Fi Limited (ASX: JBH) is an example of a company that has thrived using cost advantages to reduce prices for consumers and win market share.

Growing your money with great companies

I think economic moats are useful criteria for picking decent companies that will earn high share returns. However, to really get the best result we need to have patience; the patience to buy shares at bargain prices and the patience to let returns compound for long periods. That is the hard part.

More reading

• Where to invest $10,000 into ASX shares immediately
• CSL shares have underperformed the ASX 200 over the past month. What’s going on?
• 3 stellar ASX tech shares to buy and hold for decades
• Which is the best ASX entertainment media share?
• 2 ASX shares in the fight against coronavirus

Regan Pearson owns shares of Xero. You can follow Regan on Twitter @Regan_Invests.

The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. and Xero. The Motley Fool Australia has recommended SEEK Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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This morning the Afterpay Ltd (ASX: APT) share price continued its sensational run and broke through the $50 mark for the first time.

What a turnaround this has been for the payments company over the last couple of months.

It was around this time in March that Afterpay’s shares hit a 52-week low of $8.01. Now they are trading 525% higher than this level!

Why has the Afterpay share price rebounded and broken through $50?

Below are four key reasons why its shares have just reached this milestone:

Strong third quarter update.

At the height of the pandemic there were some in the market that feared Afterpay would struggle with lower sales and higher bad debts. How wrong they were. Afterpay’s third quarter update not only revealed incredibly strong sales and customer growth, but bad debt levels that were in line with pre-pandemic levels. The company’s flexible business model has helped play a key role in this. Users of its service may have noticed that you have to pay the first instalment of an online purchase upfront now, with three fortnightly payments to follow. This has reduced the overall risk of each transaction and doesn’t appear to have stifled its growth.

Tencent Holdings becomes a substantial shareholder.

Another driver of its strong share price performance has been the arrival of Tencent Holdings on its share registry as a substantial shareholder. Tencent is a US$500 billion Chinese conglomerate and the owner of the massively popular WeChat app. It is being seen by investors as the company that could help Afterpay expand into the Asian market in the future.

Impressive U.S. update.

Investors were also buying Afterpay’s shares after the recent release of an update on its operations in the United States. That update revealed that there are now more than 5 million active customers in the United States using its buy now pay later service. The company also revealed that more than one million new customers started using its platform in the country during a 10-week period at the height of the pandemic. Afterpay also noted a significant jump in brands and retailers using its platform. Not bad after just two years operating in the country.

Index inclusion.

A final catalyst to its strong share price gain has been its upcoming inclusion in the MSCI Australia index. The MSCI Australia Index is designed to measure the performance of the large and mid cap segments of the Australia market and has 69 constituents. Its strong performance over the last 12 months gives it a market capitalisation that is more than sufficient to be included at the rebalance on Friday. Inclusion in this index tends to bring a company onto the radar of fund managers globally and also leads to increased buying from index-tracking funds.

More reading

• Leading brokers name 3 ASX 200 shares to sell today
• The ASX 200 just hit an 11-week high. Here are 3 reasons we might be in overvalued territory
• 5 ASX 200 10-bagger shares of the decade
• Why Afterpay and these ASX shares just zoomed to 52-week highs
• ASX 200 jumped higher, rises more than 2%

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post 4 reasons the Afterpay share price just hit $50 appeared first on Motley Fool Australia.

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