The Nearmap Ltd [ASX:NEA] today responded to the ASX’s price query regarding legal proceedings launched against it by US rival, sending NEA share price down.
At the time of writing, Nearmap’s share price was down 2.6%, continuing a slide precipitated by an intellectual property infringement complaint lodged by the company’s US rival EagleView.
We covered the initial story here.
The looming legal proceedings sent NEA shares falling 23% this month, with the aerial imagery firm well off its 52-week high of $3.22.
ASX seeks answers from Nearmap
On 13 May, the ASX issued Nearmap a general query notice regarding NEA’s 6 May announcement about a complaint lodged against it in the United States District court of Utah.
Among several questions, the ASX wished to know whether NEA’s disclosure of the upcoming litigation is information a reasonable person would expect to have a material effect on Nearmap’s share price or value.
In response, NEA admitted that information concerning EagleView’s patent infringement claim ‘could have a material effect on the price or value’ of NEA’s securities.
Nearmap revealed that it formed this view after an initial assessment on 5 May, surmising that the information ‘could potentially be material to the market price of NEA shares.’
What is interesting is that while Nearmap held this view on 5 May, its public announcement the following day emphatically stated that:
‘The allegations do not affect Nearmap’s core proprietary technology and do not affect the surveying of imagery or the delivery of premium content. The business remains unaffected.’
The claim that NEA’s business remains unaffected could be in tension with NEA’s later claim made to the ASX that EagleView’s lawsuit could materially affect the value — and not just the price — of NEA’s securities.
Nearmap also divulged today that its announcement to the market on 6 May was preceded by a Board update and the creation of a subcommittee specifically convened to approve the messaging of the release.
This subcommittee was satisfied the 6 May announcement was ‘accurate, complete, and not misleading.’
Outlook for the Nearmap Share Price
As I covered last week, the upcoming patent infringement court case facing Nearmap gave short seller J Capital the opportunity to reiterate its pessimistic stance on NEA’s business prospects in the US market.
J Capital’s research suggested that if EagleView’s court challenge succeeds, Nearmap ‘may be required to pay a royalty to EagleView, find a different way to do a map, or stop producing roof measurements and roof reports altogether in the US.’
This could undercut Nearmap’s claim its core business would remain unaffected as J Capital estimated 41% of NEA’s US sales come from roof reports for the insurance sector, which uses them to assess damages claims.
Nonetheless, the legal cloud over Nearmap did not stop Morgan Stanley from retaining an overweight recommendation for NEA shares, with a target price of $3.20.
The investment bank thought NEA’s current price discounts the company’s US business, despite EagleView’s lawsuit:
‘On a [sum-of-the-parts] basis, we value Nearmap’s Australia and New Zealand business at $666 million … the enterprise value is $740 million, implying a modest $74 million for the North American business.
‘Even assuming a bearish legal outcome affecting both regions’ operating performance, plus a significant cash outflow for damages (unspecified claim to date), the current price still implies a much lower value for NA vs ANZ despite a similar revenue base, higher growth, and superior economics.’
The market wasn’t reassured by Nearmap’s response to the ASX, with the stock trading slightly lower today.
It seems investors remain uncertain about the strength of EagleView’s legal challenge and its impact on Nearmap’s US sales.
And with the likes of J Capital and Morgan Stanley offering diverging appraisals of Nearmap’s prospects, the uncertainty is likely compounded.
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For Money Morning