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Morningstar | TomTom to Possibly Sell Telematics; Shares Soared 19% and Are now Fairly Valued

TomTom stock spiked nearly 19% today after the company said it may sell its Telematics business to focus more on the automotive segment. Today’s reaction, which has brought the stock back to a 3-star rating, comes a week after TomTom shares declined 27% and went into 4-star territory as the Renault-Nissan-Mitsubishi Alliance announced it will use Google’s Android operating system for its cars’ infotainment starting in 2021, impacting TomTom’s automotive revenue. While we applaud the firm’s decision to narrow its focus more toward its automotive segment as announced today, we note that the space remains very competitive, as indicated by the Google announcement.

We did not make any adjustments to our model and continue to rate TomTom as a no-moat and high uncertainty stock with a fair value estimate of EUR 8 per share. As the stock has recovered quickly and is now trading at a 0.92 price/fair value estimate, we recommend investors wait for a wider margin of safety before allocating capital to this name.

While it appears that TomTom may sell its Telematics business to allocate more capital to the automotive segment, we have our doubts as to whether such strategy may pay off in the long run. We believe the deal announced last week creates opportunities for Google to take away connected navigation system market share from TomTom. As Google Maps are included in the agreement, the possibility of TomTom’s navigation system remaining part of the Renault-Nissan-Mitsubishi Alliance default infotainment offering is now minimal.

We continue to believe that Google’s deal could also impact TomTom’s chances of playing a meaningful role within the advanced driver assistance, or ADAS, market as a part of autonomous vehicles. 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.

Regarding TomTom’s Telematics, the firm boosted that business in 2005 after acquiring Datafactory for a mere EUR 14.3 million, or 2-3 times revenue. Through organic growth and additional acquisitions, TomTom’s Telematics business now represents approximately 20% of the firm’s total revenue. The segment has been growing at a 14% average annual rate the last three years, although we note that such growth has been decelerating recently. We expect that segment to end 2018 with EUR 180 million in revenue and grow at a 5% CAGR through 2022.

We think Telematics’ 35%-plus EBITDA margin might attract some interest, one of which may come from Verizon. Over the last six years, Verizon has made various acquisitions to expand its offerings of and reach within the fleet telematics market. Verizon’s biggest acquisition in that market was of Fleetmatics in 2016 for $2.4 billion (or around EUR 2.7 billion at the time).

In terms of what TomTom might get for its Telematics business, based on some of the larger acquisitions, such as the one of Fleetmatics by Verizon, we think interested companies could bid around EUR 1.1 billion. In 2016, Verizon bought Fleetmatics for $2.4 billion, which at that time represented trailing 12-month sales and EBITDA multiples of 7.5 and 25, respectively. By using a 20% discounted sales multiple, or 6, for Telematics, as growth in that segment has slowed a bit, we believe it is likely that TomTom would get around EUR 1 billion for that business. This also represents 5.4 times our Telematics 2019 revenue estimate. We also discounted the EBITDA multiple that the acquisition of Fleetmatics represented by 20%, and applied it to Telematics, it resulted in a possible valuation of EUR 1.2 billion. Our EUR 1.1 billion Telematics price estimate represents the average of the two.

We note that we are not certain how the firm may use the cash if it successfully sells Telematics. Some options include further investments in the firm’s automotive segment to compete a bit more effectively against Google, or possibly distributing the cash as one-time dividend to shareholders.

For now, we are maintaining our EUR 8 per share fair value estimate for TomTom.