Navigating the Sat Nav Stocks

It is a good time to revisit the rapidly improving world of satellite navigation gizmos after TomTom (AMS:TOM2) issued its second profits warning of the year on Tuesday. There are three firms who specialize in navigation software, but the issue is how it is delivered, be it via a personal navigation device (PND) or an application on a Smartphone. The share price of the other two companies – Garmin (NASDAQ:GRMN) and Telenav (NASDAQ:TNAV) – reacted only partially to TomTom’s news. We will look to see what the professional investors are predicting when the cycle of change plays out.

Smartphone’s are increasingly smart at offering state of the art sat nav and thereby offering a very appealing one-stop shop for a user. TomTom does provide an app for Apple devices (at the handsome price of GBP 69.99 for Europe alone) but its core business has been providing stand alone sat nav devices.

There has been strong, but divided investor sentiment in TomTom. Tuesday’s lowering of profit guidance was precisely what many short sellers had been anticipating, justifying its position as the most shorted stock on the AEX with 15% of its total shares on loan. Granted, short sellers had been slowly covering (down from 18% in April) to take profits from the slow price reduction, which implies they did not quite appreciate how bad the news was going to be this week.

On the flip side, the long only managers who lend their shares owned more of TomTom in late May than at any time over the last 3 years with 28% of the Free Float (98.6m) compared to 31%, as is the case with paint giant, Akzo Nobel. From September to mid January this year they were right to be buying more shares as the price doubled from EUR 4 to 8. The size of the short position was reasonably well known, but such funds must have focused on things like TomTom’s penetration of the “in dashboard” car market as a driver of growth. For now, the persistence of the short sellers has paid off with TomTom trading near its all time lows.

Garmin is to the US market what TomTom is to the European market, albeit more than six times larger and with a far more diverse client base. As a result, its shares only wobbled when TomTom reported, rebounding off their intraday lows. The recent stock borrowing flow points to negative investor sentiment towards Garmin. Short interest reversed its downward trend rising from 6% to 7.5% of total shares since mid June. Unlike TomTom, long only investors are not exhibiting positive sentiment. Admittedly, there has been a slight increase in shares in lending programs these past two weeks, but the last 6 months has been one-way traffic, where long only managers reduced holdings from 22m shares in December to a low of 17m shares in early June. Garmin's core user base are unlikely to desert to smartphones for their needs given the limitations of these devices at sea, up mountains and in the sky. However, the data shows that investors tend to believe that the chances of Garmin holding a big market share of the motoring sat nav market is looking less and less likey.

Telenav (market cap USD 767m) was the poor relation in terms of market cap, but investors are predicting its value could soon overtake that of TomTom (market cap USD 1,142m). Short selling is tiny at 0.7% while long only managers have ramped up their stake in this firm to 1.9m shares or 8.4% of the free float. Telenav’s share price has risen more than 100% since it floated a year ago, and this is arguably due to a nimble business model where the company only supplies its navigation tools via applications on other people’s platforms, thereby minimizing its cost base.