The Future of Navteq

Includes: GRMN, NVT
by: Tech101

GPS hardware is just an advanced digital radio receiver plus a calculator. The heart of the GPS hardware is a GPS receiver chip that costs about $5-8 from SiRF, GlobalLocate (acquired by BRCM), and Taiwan’s MediaTech, … The navigation software usually goes with the data and the digital map database, including Point of Interest [POI], traffic, … which is the real trick of a GPS. There are only two companies in the world that are in the data and digital map business: Navteq (NVT) and Tele Atlas, which have 60% and 40% of the world market share respectively. The wholesale prices of digital map range from about $10 for PDA or cellphone, and $70-90 for vehicle GPS.

At the current price of $300-900 apiece, GPS device is way too expensive for the majority of population. However, GPS is commoditizing rapidly with the component price coming down and technological barrier crashed. Garmin and Tomtom – the largest two GPS hardware makers cannot keep the lion’s share of profit margin forever. In a few quarters, every low-cost hardware assembler will flood the market with products that sell for only $50-200.

On the other hand, creating street-level map data is a slow, expensive, and labor-intensive but low profit margin process with high entry barrier. That is why there are only two major players. Thanks to the growing importance of Location-Based Services/Solutions [LBS], it becomes clear that if you own the data, you could control the market. Basically, everything relying on the digital map database used to locate people and points-of-interest, and/or select routes based on traffic information.

On July 23, the Dutch GPS makers TomTom announced the plan to buy Tele Atlas of the same country for $2.8 billions. The news causes some speculations in the LBS industry and likely shakes up the personal navigation device, cellphone, and GPS market, particularly the role of Tele Atlas’ only remaining rival - the Chicago-based larger digital map supplier Navteq. One third of Tele Atlas’s revenue comes from TomTom and it was losing money until the latest quarters. In principle, the Tele Atlas – Tomtom merge is a violation of Economics 101 – don’t fight with your own customers and will drive many Tomtom’s competitors into Navteq’s arm.

TomTom is facing intensive competitions from Garmin, Magellan, ... and tens of other GPS gear makers, particularly the newer and low-cost manufacturers from Asian countries - Korea, Taiwan, and now China. These GPS manufacturers may switch from Tele Atlas digital maps under TomTom - a powerful competitor to NVT – causing "collateral damage" to their sales effort. This move only shows how strongly Tomtom wants to control the digital map data and how desperately Tele Atlas wants to be sold even at such a low price. All these factors not only will drive more digital map customers to NVT, but also increase the odds that NVT to be acquired by GRMN, MSFT, YHOO, GOOG, …

As Navteq just might find itself in the crosshairs of an acquirer, let’s exam who would be the winners and losers in the following four scenarios:

1. NVT stays independent:

• Winners: NVT, Google, MSFT, all the small GPS makers;
• Losers: Tomtom/Tele Atlas. Garmin – without the direct control of a digital map producer - might also be weakened by the competition from the small and low-cost GPS manufacturers. In order to not become a loser, GRMN has to act fast that leads to the second scenario;

2. GRMN Acquiring NVT – GRMN and TomTom control GPS, digital maps and all Location-Based Services/Solutions [LBS]:

• Winners: NVT/GRMN and Tomtom/Tele Atlas become the duopolies with the control of digital map database.
• Losers: Google, MSFT, and all the small GPS makers. In order to not become a loser, Google or MSFT have to do something that leads to the third scenario;

3. Google or Microsoft acquiring NVT:

• Winners: NVT, GOOG (or MSFT) and all the small GPS makers
• Losers: GRMN and Tomtom/Tele Atlas because all the small GPS will make GPS a commodity. GRMN and Tomtom will lose their edge with lowering profit margin in the competitions.

4. Private Equity Acquiring NVT:

• Winners: NVT
• Losers: Tomtom/Tele Atlas and perhaps GRMN, too.

As the analyst April Horace at Janco Partners stated in their August 1, 2007 Equity Research Report:

We Think NVT Has the Opportunity to Be the Next RIMM -Two years ago, RIMM traded at $70.00, and now is trading at $220.00, an increase of 3x in two years. Based upon estimated 2008 consensus EPS estimates for RIMM, the P/E ratio is approximately 37x to 40x. While we are not ready to publish a 2010 price target, we believe that NVT could potentially have the same experience over the next two years.

No matter how you slice it, the competitions among the potential acquirers along with improving revenue and profit may boost NVT’s share price to 80 - 100 before the end of the year.

Disclosure: Author is long NVT

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