The Risks of Betting on the Transformation of Automobiles

The Risks of Betting on the Transformation of Automobiles

Hedge funds recently are interested in taking the long position on Telenav (NASDAQ: TNAV). According to Insider Monkey, the number of hedge funds with positions in TNAV rose from eight to 13 at the end of 2018 and the beginning of 2017. Then it slid gradually back to eight over the course of the year 2017. But the number has been rising again of late.

It isn’t too difficult to figure out why hedge funds are interested. A significant cadre of hedge funds have focused on the tech industry for years now. Some of the bets they have made in this area (Tencent, Alphabet, and Alibaba) have been tremendously successful.

Telenav is a corporation that develops and sells wireless location-based systems including GPS navigation. It’s particularly interested now in “connected cars,” that is, with systems that connect vehicles to the cloud for real-time traffic alerts, speed flows, and estimated times of arrival.

There are 24 million cars on the roads today with Telenav systems onboard. Of those, 14 million are connected cars.

The automotive industry is in the middle of a great transformation, including everything from artificial intelligence to the new low-emissions engines/motors to the recently discovered indispensability of in-vehicle infotainment. It is to be expected that some hedge funds will want to take a position on that transformation. Telenav is one way to play that.

A Classified Board

One recent big win for Telenav, one that confirmed in some minds that it is a good bet on the future of the industry, came in August 2017, when Daimler AG selected its OpenStreetMap platform and its navigation SDK.

Despite that and other successes, Telenav is clearly a speculative play. In the words of a recent SEC filing: “We incurred losses in each period since fiscal 2015. We expect that we will incur losses during fiscal 2020 and we do not know when, or if, we will return to profitability, as we make further expenditures to enhance and expand our operations in order to support growth and diversification of our business.”

It is worth mentioning here that Telenav has a classified board of directors, with one-third of the board elected each year for a three-year term. This means that it is impossible for a “raider” to replace a majority of the board in any one election. Classified boards are controversial, for just this reason, and are frequent targets of corporate-governance reformers. But defenders of classified boards often cite precisely such situations as this. They claim that some corporations benefit by taking a long view, by accepting losses for years while necessary re-tooling expenditures are incurred.

GM, Google, Microsoft

Telenav has shown up of late in the headlines. In September 2019 General Motors, which represented 18% of TNAV’s revenue in the last fiscal year, announced that it was going to be featuring Google apps, to be built directly into touch screen displays. This persuaded the market that Alphabet, the parent corporation of Google, was going to be getting business Telenav had formerly received. The price of TNAV stock dropped sharply.

The company’s position is that there is room within GM cars for both itself and Google.

Insider Monkey says that heading into the third quarter of this year, a dozen of the hedge funds it tracks were bullish TNAV, and some were actively increasing their positions on the long side at the time. Unfortunately, the stock returned -40.3% in the third quarter, which included the September fall-out created by the Google news.

As part of its reaction to the GM/Google news, TNAV made an announcement presumably intended to show that it could conclude business alliances of its own. It said that it was in talks with Microsoft to integrate its car solutions suite with the Microsoft Connected Vehicle Platform, which runs on Microsoft Azure.

Another Headline Hit

More recently, there’s been another headline hit. The plaintiffs’ law firm Purcell, Julie, Lefkowitz announced that it is investigating Telenav “for possible breaches of fiduciary duty by its board of directors.” In plain English, it is drumming up support for a class-action lawsuit.  PJL has not been transparent about the specifics of its investigation, so this is a matter for conjecture.

The safest conjecture is that PJL and the “class” it hopes to represent will argue that the directors knew or should have known of the impending news about Google and GM before it broke, and about the stock price’s vulnerability to that news. It will blame the directors for supposedly covering up the bad news.

TNAV started this year below $5, rose above $11 in August, then fell sharply on the GM news. Its price has stabilized since then, again below $5, but there has been no bargain hunters’ bounce.

It is a sure bet that the auto industry will look a lot different in five to 10 years, but it is not at all a sure bet who will benefit when that happens.

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