Last month, Nearmap’s (ASX: NEA) results did not impress shareholders, despite showing a strongly growing underlying business. Since then, shares have fallen a further 8.8%.

Newer investors are likely wondering if their original thesis still remains intact.

The drop

Nearmap shares have traded as high as $4.23 this year as investors saw opportunity in another high growth recurring revenue tech stock. Its appreciation was such that it was often compared to the so-called WAAAX stocks (Wisetech, Appen, AfterPay, Altium & Xero).

But with a price to sales ratio of over 24 at the peak — which is well above the norm for most growth stocks — it would seem that the market price couldn’t sustain the hype, despite the ongoing growth in sales.

Where the value sits now

Momentum only takes you so far and, ultimately, valuation matters most — a lesson that growth investors need to keep in mind.

With a current market cap of $1.16 billion, the price to sales ratio has since decreased to a much more reasonable (but still optimistic) ratio of 15x on its most recent revenue of $77.6 million.

Those that prefer to measure against annualised contract value (ACV), which presently sits at $90.2 million, are looking at a EV/ACV of almost 13x. Compared with Xero’s (ASX:XRO) 18x multiple, that’s relatively attractive, although it’s nevertheless high in the context of historical average multiples.

Can Nearmap’s growth justify this valuation?

Of course, higher multiples are perfectly justified if profitability and growth are sufficient.

Nearmap is still loss making, although is now generating positive operating cash flow. And the growth in ACV continues to be impressive; around 39% per annum, on average, over the past four years.

At the current price, though, a lot of optimism is still priced in and investors must be confident of sustained and strong growth — as well as cost discipline — in order to make the case for value.

Ranked #5 on Strawman, it’s clear many members remain optimistic. Click below to dig deeper into their reasoning…

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