A Tail of Two Companies

It was the worst of times

Here's a company: it operates three businesses loosely centered around traditional communications. It runs a wholesale voice and SMS service, an international long-distance calling business, and mobile top-up and other non-cash digital payments.

In addition to being loosely centered around traditional communications, a thing these businesses have in common is that they are going extinct. Whizzy, high-tech, and, in some cases, free alternatives are driving each of them into the history books. These businesses have short tails. Extinction is distasteful to many investors.

Another thing that these businesses have in common is that they generate cash. A lot of it. As long as they still have customers, they are capital-lite services that reliably bring cash in the door. This is attractive to investors.

So, balancing impending extinction against cash coming in the door, the businesses have some value. They'll be around for a few years. Cash will come in. Then, at some point, that will stop and the businesses will go away.

As long as you, the investor, pays significantly less than the cash that the businesses bring in over that time, you have a chance at making a good return.

It was the best of times

Here's another company: it operates three high-growth ventures. It sells point-of-sale solutions for independent shop operators, runs a cloud-based enterprise communications service and offers an international remittances service.

One thing that ties these businesses together is that each of them is very growthy and address large markets. Pretty much all investors like growth. Another thing they have in common is that they don't make much money, yet.

Each of them is taking a somewhat different approach than existing alternatives. The company is investing in these, which means that, while they're "high-margin," they don't generate much cash yet. Investors only stand a chance of making a decent return if the businesses continue to grow and the company doesn't run into any funding issues. If they get past that, they'll be self-funding and return cash to shareholders, but not quite yet.

It’s All the Same to me

The plot twist here, if you haven’t guessed, is that all the operations are in the same corporate boat. The company, IDT, serves a particular cohort of customers - largely immigrants, most still with ties back home. These customers aren't well served by generic alternatives, so its made sense for management to bundle and cross-sell some of these services, even if they look like they have nothing in common.

One side of the business houses the "melting ice cube" (management's words, not mine), the other side houses the bright growthy future. The fact that they all live together makes it difficult for investors who bucket themselves into either "growth" or "value" or by industry or any other silo, really.

If you're a "growth" investor, you can't own this thing - most of its business is shrinking. If you're a "value" investor, you might not want it because too much of the potential value comes from growthy things. If you're a telecom investor, you don't want it because of the payments parts and the retail business. The opposite is true if you're an investor in one of those other buckets. Maybe its not surprising, then, that a small, hard-to-categorize company is ignored and might be cheap.

Its price in the market is less than the short tail of the bad batch of businesses (the most stable foundation for value). These are likely to generate enough cash to cover the whole enterprise. If you like the growth side, those businesses have a long tail of cash generation stretching into the future. The market price of all six businesses is likely less than what the point-of-sale business is worth. Either way you look at it, it looks like a bargain.