That link to
https://kalkinemedia.com/au/blog/3-stars-for-these-3-stocks-pph-nea-hvn should help the SP – at least neutralise negative sentiment pervading stock generally. The words,
“ . . .invested heavily in its core technology and customer proposition to bring differentiated and high-value content types . . .” tempted me to complete my recent focus on NEA's business dynamic to support the view the view that NEA could generate good positive cash flow in the near future, and via astute management, excellent free cash flow for many years.
Pricing economics underpins the considerations that skulk behind the text book demand and cost curves used to graphically represent a firm's business dynamic). This may not interest many HC readers generally, but having covered part of pricing economics in my recent two posts, this post closes the matter for me. The post is wordy because I must presume that readers have not been exposed to some of the concepts and jargon used by economists.
Because this is a NEA subforum, the considerations here are reduced to fit NEA – that is: a highly scalable business; technology that allows differentiated value packaging; high fixed and semi-fixed costs with very low varied-by-volume costs (using “costs” to include “expenses”
; and being a quasi-monopoly supplier. To elaborate:
- High Scalability – The business can scale significantly without hitting bottlenecks, and with near-zero marginal costs
- Differentiated value packaging – Common (meaning “same” inputs (imagery, computing and transaction handling resources) can be packaged and presented in ways that are very different from a value perspective.
- Costs – High fixed and semi-fixed costs, and extremely low (near-zero) marginal cost create barriers of entry, and an ability to be extremely profitable past a relatively high break-even point.
- Monopolist – This is a matter of degree, not an absolute truth. The main affect of monopoly is the disjoin between costs and pricing.
To simplify the cost side of the business, I have confined NEA to be a North American and Australasian business. When geographic expansion becomes worth considering, the considerations can be handled on a major-project-justification basis. For now, I treat projects to get into new verticals, or to enhance them, as being business as usual.
It is easy to understand that if considerable costs are spread over an expanding volume of business in a given geographic footprint, then beyond the point when total revenue exceeds total cost, the business would be profitable, and the degree of profitability would depend on the shape of the total revenue curve relative to the total cost curve. However, to make the effects of the foregoing four dot points more patent, it is useful to think in terms of marginal cost and marginal revenue – that is, what would a bit more Nearmap usage cost, and what could NEA charge for it if the four dot-pointed characteristics were in place.
In previous posts I mentioned that to conduce new customers to purchase Nearmap usage, NEA can usefully contrive limited-life freebies, because the value of that usage becomes known to more prospective customers at near-zero marginal cost to NEA. Because NEA is in effect close to being the whole market supplier, it would be inclined to do whatever it reasonably takes to drive the whole market, and freebies should be viewed as marketing – business as usual.
A monopolists rail business that can differentiate on the basis of “what the traffic can bear” would tend to charge more to haul high-value-to-weight products than low-value ones, because it can prevent competition from alternative service suppliers. NEA can package its bytes of captured data and its IP embedded in apps to produce different value propositions, and charge for usage according to value to users, not cost to NEA if they are low. When competition exists, prices would tend to move closer to marginal costs, and consumers gain a “consumer surplus” – that is, customers pay less than they would have in a setting where the option is limited to pay, or go without.
