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Technology Stocks : NVT - Source of GPS Software, Data, and Maps
NVT 15.59-7.6%4:02 PM EDT

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From: tech1018/1/2007 3:59:58 PM
   of 211
The Future of Navteq

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 (already bought by BRCM), and Taiwan’s MediaTech, … The navigation software has also become a commodity, which one can get almost free. The real trick of a GPS is the data and maps, including Point of Interest (POI), traffic, … that are provided only by Navteq and Tele Atlas, which have 65% and 35% of the world market share respectively. The wholesale prices of digital map range from $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 for long. 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 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 Location Based Services/Solution (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 (NVT).

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 all the 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 not buy Tele Atlas digital maps from TomTom - a powerful competitor - any more 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 the main competitor to Tele Atlas, based Navteq may pick up business from device makers that don't want to buy from Tele Atlas now that their rival, TomTom, owns it.

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 keeps 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/MSFT and all the small GPS makers
· Losers: GRMN and Tomtom/Tele Atlas because all the small GPS will soon 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.

Now that the NVT 2007 report is out, under a normal market environment:

1. If NVT had missed the number a little, the market would have forgiven it because of the imminent take-over possibility and the stock would have stayed unchanged at about 55;

2. If NVT just met the numbers, the market would have been encouraged because of the imminent take-over possibility and the stock would be up to about 60.

3. If NVT beat the numbers in a small margin, the market would be excited because of the imminent take-over possibility and the stock would be up to about 65;

4. Since NVT beats the numbers in revenue, earning, and guidance with a huge margin, the market should be thrilled because of the imminent take-over possibility and the stock price should blow away and reach 70.

Remember, Navteq is a high-growth company in a high-demand hot GPS market with a monopoly position.

We will see.
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