TOMTOM NV AMSTERDAM (TMOAF): Market Undervalues Cash Flow And … – Seeking Alpha
by admin on October 24, 2013
The Dutch company TomTom NV (OTC:TMOAF) is the last independent provider of digital maps, spanning a large part of earth. This is a scarce and thus valuable asset.
Smartphone makers that aspire to offer the best experience to users need the maps provided by TomTom. Apple (AAPL), Samsung (SE) and Blackberry (BBRY) are currently licensing the TomTom maps. Amazon (AMZN) is moving into smartphones (currently licensing data from Navteq/HERE) and Facebook (FB) could be another interested suitor or client.
The competition: Navteq (now called HERE) and Waze are now owned by respectively Nokia (NOK) who’s device division has been sold, and its maps division licensed to Microsoft (MSFT) , and Google (GOOG). Nokia bought Navteq for $7.1 billion in 2007 and Google just bought Waze for $1 billion.
Competition
Building maps is a highly capital intensive business. In addition once you built the database you are competing with every other provider of maps. That makes it a unattractive business to enter for new incumbents and it keeps the number of competitors limited. In addition significant yearly capital expenditures are required to keep the maps updated and/or expand the database.
It’s very hard to sustain above average returns on capital on the map business alone because there are no real barriers to entry other than high capital requirements.
Important players:
¦Navteq/HERE
¦TomTom(Tele Atlas)
¦Google Maps+Waze
TomTom is Cheap
TomTom acquired the map building company TeleAtlas in 2008 for $4.3 Billion. TomTom continued to fund the upkeep and expansion of themap database.
Nokia bought Tele Atlas competitor Navteq in 2007 for $8.1 billion in what was regarded as pivotal move by Nokia into location based services. Microsoft has bought up Nokia’s devices division but Navteq wasn’t part of that deal and is now called HERE. Microsoft has a four year licensing contract with Navteq that cost $2 billion.
TomTom now has an enterprise value of about $1.73 billion. Trading at less than 5 times free cash flow with a price to book of 1.16 including $1 in cash per share, the company is dirt cheap.
TMOAF EV / Free Cash Flow TTM data by YCharts
Future of TomTom is Bleak
The low valuation is caused by the rise of the smartphone and their increased ability to double as a PND. PND’s represent about half of TomTom’s revenue. This revenue stream is falling rapidly while the other revenue streams are not able to make up the difference in the short term. Another threat is smartphones substituting TomTom’s professional navigation systems targeted at companies as well.
With the core business facing mortal threats and clients licensing its maps able to play TomTom and Navteq (HERE) against each other, to force them to compete on price, the future of the company looks bleak.
However there are two options that would unlock shareholder value in excess of the current share price almost immediately: A buyout/sale or a break-up/spin-off.