Reading some of the responses today in regards to the latest CR has given me many mixed and conflicting emotions.
These conflicts arise not because I agree or disagree with their views, BUT because even within my own mind, I also have these conflicting thoughts bubbling away...
So are we better off to have Nearmap grow Organically or Aggressively ?
That is the question.
Now I'm sure one can debate and debate on this issue until the "cows come home", so I just want to lay out some seeds of thought on this issue before giving my opinions.
For virtually any business, there is absolutely no doubt that growing organically will be less risky as it allows a brand and a customer base to build over time, it also allows a business to sensibly seek finance as they grow at a sensible pace. Mistakes can be gradually smoothed out and lessons learnt can be reinforced by improved processes and cultural changes within the company. Investors also get more time to identify & react to trends via a set of 'somewhat' predictable and slow changing financial measures. In other words, it feels good to own an organically growing company and everyone can "sleep better at night" knowing that company expenses are in check, with profits & share price all slowly rising over time. Happy Days...
However, the issue with an organically growing company is that it takes
TIME.
And
TIME is a resource that is often invisible and yet so precious in achieving the required
Competitive Advantage or
Market Dominance for any technology company that are operating in a
fast changing
dynamic environment.
Conservative investors should not solely think about the valuation of a company by earnings & profits for rapidly growing tech companies, that's because I often see profits taking a "back seat" when market dominance, brand recognition, active user uptake are all thrown into the mix of a fast growing tech company's valuation. Facebook, Twitter, eBay, Amazon, & even Tesla all come to my mind as once fast growing tech companies that strived for market dominance &
RAPID user up take
ABOVE & BEYOND earning a profit in their beginnings & I see Nearmap as no exception. I mean, can you even imagine if Facebook or Twitter or eBay had decided to only expand into a new country when & ONLY when they've reached profitability in the previous country that they've rolled out? Again this sounds sensible for a traditional retail business but absurd for fast growing digital entities. And if you considered the dominant positions that these giant tech companies enjoy right now, considering the number of geographical markets they are in, an organic growth strategy would have taking them half a century to achieve global domination. And I won't even go into all the social, political, & technological changes that "could" potentially disrupt these tech giants over half a century.
Anyway, to put this amount of 'organic growth'
TIME into perspective for Nearmap, I used the revenue growth between FY2014 to FY2015 (i.e. the period before all major US expansion expenses had occurred) then projected new profit targets between FY2015 to FY2018 thus we get (assuming we hold all expenses constant at FY2014 levels):
Actual FY2014 Profit -> +$7.078 m
Projected FY2015 Profit (i.e. if US expansion did not occur) -> +$9.213 m
Projected FY2016 Profit (i.e. if US expansion did not occur) -> +$11.993 m
Projected FY2017 Profit (i.e. if US expansion did not occur) -> +$15.611 m
Projected FY2018 Profit (i.e. if US expansion did not occur) -> +$20.321 m
Now I know this is rough, but based on the above, to grow
organically and
accumulate $20m in profit (ie. to equal the amount raised from the previous CR), the TIME that Nearmap has to wait is approximately
2 years.
I'll now take another leap of faith and state that if Nearmap is to
organically grow into Europe and Asia in a similar fashion, then the combined delay in
TIME expanding to US->wait->Europe->wait->Asia is approximately 6 years WITHOUT any CRs.
Naturally I understand there are lots of variables involve in doing such calculations but even if the combined
TIME delay effect was halved to only
3 years. Is the share dilution worth it back in Nov 2016?
Before you answer this question, consider this:
On 25th Nov 2016, Nearmap issued a total of 28,571,429 for the $20m institutional placement, this created a dilution of 8% with 385,617,530 shares outstanding post placement. On 25th Nov 2016, NEA's closing sp was $0.695 representing a new Market Cap of
$268 m.
So exactly
3 years (which is the organic growth time frame we are trying to save by doing a CR) later on
25th Nov 2019, what do you think NEA's market cap will be? I'll take another stab and say even
IF (& this is a
HUGE IF) our sp remained stable at $1.6 a share until
25th Nov 2019, the market cap of the twice diluted company will be
$704 m.
Now, I don't know about what others are thinking, but if Nearmap asks me if I will dilute my shareholding by 8% and then by a further 10%, BUT then promises to grow the Market Cap by over 160% in an accelerated growth path (hence saving 3 years or more).
I'll definitely say YES !
Enjoy the ride everybody !
