Well, that’s been a tough couple of months after the share price closing in August at $3.08. I had a look at the share price over 24 months, since it was around $1.50. It hit a high of $4.29 in June 2019 and a low of $0.83 in March 2020. What should we conclude? One obvious conclusion is that the market has no idea about the true value of NEA. For those who believe that the market is always right, I suggest you read the following article by Alan Kohler in the Weekend Australian, which explores why some fund managers are giving up on traditional valuation methods:
https://www.theaustralian.com.au/business/economics/taking-stock-of-meaningless-valuations-as-zero-rates-inflate-assets/news-story/6b0dcd9670b4f69e6cffa1b8a88acc24
For thosewithout access to The Australian, this quote from Mark Schmehl, portfolio manager at Fidelity Investments is most interesting: “Valuation, I find, is a useless tool. If you base your investment decisions on valuation, you are never going to make money.” Reasons include that DCF calculations are no more than an educated guess, and that P/E ratios are no longer any help in sensibly valuing technology companies, mainly because they do not have earnings yet, or if they do, they are deliberately held down by investing for growth. This sounds to me a lot like NEA, which has twice raised capital to accelerate growth.
It should be clear to those that follow NEA that it is a very much better company now than it was 16 months ago at the share price high in June 2019. Some of the key successes since then have been:· Introducing new features such as 3D, AI and roofing geometry;
· Rapidly growing sales to governments and the insurance and roofing industries in NA;
· Being able to continue and grow operations since February 2020 when Coronavirus took off, by successfully “working from home”;
· Effectively managing cash flows to break even during the uncertainties surrounding theearly stages of Coronavirus;
· Raising $95.2M in capital to further accelerate growth to the mid-high point of theguidance range.
ACV in NA has more than doubled in the last 2 years, and based on the recent growth rate in the largest verticals should do so again in the next 2 years. My base case (covered in my last few posts) is for NEA’s group ACV to double in the next 3years (i.e. around 25% pa). NEA now expects Group growth to accelerate to the mid-high point of the range of 20-40%. This indicates that NEA expects group growth of around 35%, and growth in NA of around 55%. IMO the market does not yet agree with management’s guidance.
Is the market or management likely to be right? IMO, I back management over the market, as any of the following events should lead to even better ACV growth outcomes than my base case, and more in line with management’s expectation of growth acceleration from FY22:· The fastest growing NA verticals continue on their current growth trajectory;
· The new capital is successfully invested in growth strategies as already outlined;
· NA reaches sustained cash-flow positivity (excluding the increased growth capitalexpenditure);
· Successful roll out of HyperCamera3 with increased operational efficiencies and widercoverage;
· New or expanding use cases, such as utilities, which has been substantial in ANZbut has hardly penetrated yet in NA;
· Growing NA cash generation is used to fund expansion into new geographical areas, usingthe successful models proven in ANZ and NA;
· Expanding offering into other parts of the geospatial industry market;
· Other technological advancements and improved offers to the market.
P.S. Based on past practice, we should get a performance update at the AGM on 12 November.
