When Chanticleer went in search of leading global tech stocks listed on the ASX it was only a matter of time before the pathway led to geospatial mapping outfit Nearmap and diagnostic imaging stock Pro Medicus.
Without much fanfare these companies have built global software platforms that are far more advanced than the products offered by their competitors. They have successfully targeted expansion in the United States with business models that lock in annuity-style revenue.
The two companies have much in common. Both are offering customers innovative ways of viewing images. Nearmap offers images of the earth collected by aircraft while Pro Medicus allows doctors to manage images of the body.
Nearmap and Pro Medicus stood out from the $80 billion worth of tech stocks listed on the ASX for two reasons – their phenomenal growth prospects and their nose bleed-inducing valuations.
To get an idea of the growth prospects consider the numbers being pumped out by broking analysts. Pro Medicus is on track for 27 per cent compound annual growth in revenue from its patented picture archiving and communication system between 2014 and 2021, according to Peter Meichelboeck, analyst at Select Equities.
Nearmap is forecast to lift its annual revenue from $53.6 million in 2018 to $125.6 million in 2021, according to Keiran Hoare at Moelis Australia.
The astronomic valuations are obvious from the accompanying table, which compares key financial and valuation metrics for Nearmap and ProMedicus with Apple, Alphabet (Google), Amazon, Facebook and Netflix.
It probably will not have escaped the eagle eyed reader that Nearmap does not have a price earnings multiple for 2019. That’s because consensus estimates say it will still be losing money. But it is forecast to make a profit in 2020 which would mean a price earning multiple of 171.
A few obvious question flow from this comparison of the two Aussie minnows with some of the world’s largest companies: are Australians paying too much for growth? Does our market have the capacity to fund international expansion by home grown companies?
Nearmap this week provided an emphatic answer to one of these questions when it raised $70 million to accelerate its expansion in the US.
It was hardly the perfect week for an Australian technology company to go to its shareholders for more capital.
The overall market was gripped by bearish sentiment fuelled by a tech stock sell-off in the US, partly caused by concerns of more intense government regulation. The heavy selling resulted in the S&P ASX200 this week recording its the longest losing streak since January 2016.
But while brokers searched for reasons to explain the dumping of stock by foreign investors, institutional investors in Nearmap jumped at the chance to buy some of the 43.7 million shares issued at $1.60 each.
It says a lot about the market’s belief in Nearmap’s prospects that its shares closed the week at $1.865, a 16 per cent premium to the price of the new shares and a premium to the price prevailing before the stock was issued.
Nearmap chief executive, Rob Newman, tells Chanticleer that his company got a significant boost when global investment bank Morgan Stanley initiated coverage earlier this year. He says it has brought the company to the attention of several international investors who have bought stock.
The beauty of the Nearmap software platform is that it is scaleable in multiple geographies with payment by subscription. The global aerial imagery market is worth about $US7.4 billion and is tipped to grow to $US10 billion by 2020.
Newman is happy to have stuck with the ASX, which this week proved its worth as a platform for raising expansion capital.
The ASX has carved out a global leading position in the mid-cap tech space (less than $US500 million value) as shown by the accompanying graphic. Nearmap and Pro Medicus are now worth $738 million and $1 billion respectively.
One avid believer in Pro Medicus reckons it is the next CSL. But Pro Medicus chief executive Sam Hupert says that might be a sign of the market getting a little ahead of itself.
Nevertheless, Hupert is bullish about his company’s prospects. Its 2018 result included a comment that its contract opportunities had never been higher.
Pro Medicus business model involves signing long term contracts with leading hospitals and clinics. It gets paid to implement its software and it then agrees to minimum usage of its imaging software based on the number of transactions. Clients agree to pay for a minimum number of transactions each year and pay extra for anything beyond that.
It is extraordinary that the software at the heart of the Pro Medicus product offering was developed in Germany and the US at a cost of about $US45 million before being bought by Pro Medicus for about $6 million in 2009.
This opportunistic purchase was a combination of strategic insight and good luck when a large company failed to see the value of its own assets.
The key owners of stock in the company are Hupert and Anthony Hall. Each owns about 30 per cent of the company. They sold down about 3 per cent of the company but look to be in for the long haul.
Australian investors have been willing to pay a lot to ride the growth in Nearmap and Pro Medicus. This can be partly explained by the lack of other tech choices.
But the really compelling reason for backing these companies is their global leadership in their chosen areas of software.