EUR 850.00 For Business Accounts Only

Morningstar | TomTom Stock Hit by the Renault-Nissan-Mitsubishi Alliance and Google Deal; Lowering FVE to EUR 8. See Updated Analyst Note from 20 Sep 2018

TomTom shares dropped around 27% over the past couple of days, after the Renault-Nissan-Mitsubishi Alliance stated on Sept. 18 that it will use Google’s Android operating system for its cars’ infotainment, starting in 2021. This announcement will affect TomTom’s automotive segment revenue after 2021, and we have adjusted our model accordingly. As a result, we now value TomTom shares at EUR 8, down from our previous fair value estimate of EUR 9.20 per share. The stock has now entered the 4-star territory.

While Google’s Android car infotainment operating system can include non-Google navigation systems, the deal does create opportunities for Google to take away connected navigation system market share from companies such as TomTom. According to the Renault-Nissan-Mitsubishi press release, the new agreement does include Google Maps, which could possibly eliminate any possibility of TomTom’s navigation system remaining part of the Alliance’s default infotainment offering.

This could also affect TomTom’s chances of playing a meaningful role within the advanced driver assistance, or ADAS, market as a part of autonomous vehicles. As we noted in our initiation report, companies such as Alphabet, with its Waymo self-driving operating systems, are more likely to work closely with a variety of OEMs and possibly prevent TomTom’s ADAS offerings from gaining traction in that market.

The announced deal also supports our no-moat rating for the firm. We still believe that while TomTom’s navigation system and data offerings allow it to provide various components of infotainment systems to OEMs and/or dashboard technology vendors, the firm faces stiff competition from companies such as Google, as demonstrated by this news. In addition, in the short-term, TomTom continues to face threats from Apple’s CarPlay and Google’s Android Auto, which basically connect car infotainment systems with drivers’ mobile devices and provide user interfaces very similar to what the drivers are more accustomed on their smartphones.

While we foresee TomTom’s automotive revenue growth to get hit as a result of the agreement between Google and Renault-Nissan-Mitsubishi, we still expect double-digit growth in automotive revenue through 2021, as the presence of TomTom’s traffic, navigation, and map technology is likely to increase during that time. Since 2016, the firm has signed new or renewed agreements with a variety of original equipment manufacturers, or OEMs, including Peugeot, Fiat, Toyota, Volkswagen, Subaru, Alfa Romeo, Mercedes-Benz, Hyundai, and Kia.

Although the impact of this announcement won’t be seen until around two to three years down the road, it will result in lower automotive revenue growth than we had previously modeled into our five-year projection period. Accordingly, we have lowered our growth assumption for TomTom’s automotive segment to 7%, from 10%. In addition, we think the lower sales will pressure gross margin slightly. For this reason, we now expect 70% average gross margin during the next five years (down from our previous assumption of 71%), which, combined with higher R&D spending, will drive average operating margin during the same period to 6%, down 2 percentage points from our initial assumption.

Lastly, we think this agreement will create additional opportunities for Google and Alphabet’s Waymo to work more closely with OEMs as the march toward Level 5 autonomous vehicles continues.