Had a conference call with the management today and I walked away with more questions and concerns. Their cash flow still seems strong and the Ethernet exchange business looks to be a valid growth opportunity. Although I’m taking out the cash until I can get comfortable with the pricing issue related to their voice business.
5 responses to “Sold Out: TNDM”
Paras, what was that you did not like about pricing?
here is my long rant about the concerns w/ TNDM:
I had a talk w/ mgmt this week and it seems like pricing is still an issue. looking at prior quarterly filings, it seems that pricing per minute has dropped from $.002 to $.0018. Based on mgmt estimates, they are looking at $.0017 in the coming year.
Based on the conversation with mgmt it seems like it could drop further. At some point pricing can’t drop much more, question is where is that point. Also, mgmt is looking at growth rates of 5-8% going forward, so based on how pricing goes you could look at CF decreasing. Although at current prices you are getting the company at a huge discount to CF, so even if we account for decreases in CF we are still looking at cheap valuation at current prices. But without having a good understanding of where the bottom is, it is not clear what valuation you are buying the company (it could be 3-4x CF or 6-7x).
Other concern I have is it not clear is the voice business is viable in 5-10 yrs out. I think voice business won’t go away in the next 1, 2, or even 5 yrs. But it is not clear if the business will be as strong in future. My understanding of this means that the ethernet business is not “an option”, instead it has to work. If voice business is going to be hurt in the future then something else is needed to compensate for it. Obviously in the next 2-3 yrs, at least, TNDM could double revenue (mgmt is modeling 150-200M in rev from ethernet exchange business in 2-3 yrs) and substantially increase CF. But if the future of voice business is written on the wall (based on the conversation with mgmt, mgmt couldn’t convince me it wasn’t written), then another business line is needed to supplement the loss.
I guess my concerns could be something that is causing the market to discount the prices so much. Maybe my concerns are already priced in, so any good news could cause a big move up. Uncertainty is a friend of value investors, I guess in this case I can’t rationalize how the uncertainty will play out and what it would be mean for the business.
Pricing is a point, but they are also beneffiting from significant economies of scale and they do have a moat so I think competition can not be profitable at this prices.
Still have not bought yet…
As for moat, I’m not sure if this company has a moat if their business can go away or fundamentally change in 7-10 yrs (could be sooner or later).
I think the company could do well and the share price could rebound substantially. It could be a great buy at current prices. I just can’t get comfortable w/ the concerns in my mind. Will probably wait until I can get comfortable w/ pricing.