Truecaller: An Undiscovered Gem At An Even Better Price (OTCMKTS:TRUBF)

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If you’ve read some of my articles, you know I like high-quality companies. It is hard for me to invest in pure value plays if the underlying assets are bad. I seek to invest in the best, but the best, especially in the higher market caps, are expensive. Generally, I believe that paying for quality pays off eventually. But I also believe that if you look beyond the blue chips and are willing to go beyond US borders, you can discover truly high-quality companies at much better valuations than in the US. Truecaller (OTCPK:TRUBF) is one of those businesses.

It is a business with two founders leading it, along with high insider ownership, high returns on capital, growth, a moat, and a reasonable price. Let’s dive in.

The Business

Open your phone and navigate to the Google Play Store or the App Store on Apple. Type “Truecaller”. If you have an Android device, you will see 1 billion downloads. That is the number of downloads Truecaller managed to achieve. However, this is not the number of users; though the number of users is also impressive, at above 370 million. This is how many users Truecaller has. Compare this to other apps, and you won’t find many. I believe this is a winner-takes-all situation here. Compare it to other apps of this kind, and you won’t find many serious competitors. I’ll explain why later.

Meanwhile, Truecaller is the leading global platform for the verification of contacts and blocking unwanted communication. They enable safe and relevant person-to-person conversations and efficient business-to-consumer calls. Truecaller offers a lot of safety features, such as spam blocking, caller ID, and many more features to give the user better safety on their phone. They also have messaging services as well. They even have an AI assistant which helps users filter out fraud and scam calls.

Truecaller has three revenue avenues. The first and the biggest is the ad revenues (78%). The second is the consumer subscription revenue, and the third is B2B revenue. The subscription revenue and B2B have kind of equal revenue, both are more resilient and grow faster than the ad revenue which is more volatile and depends on macro conditions. The subscription revenue is for paying subscribers who get an ad-free version and many additional features. This segment grew 23% year over year. The B2B revenue gives businesses a path to be reliable to the consumer. How many times you didn’t take a call because you thought it was a scam? The Truecaller services for businesses verify it is the business and thus increase the chance for the customer to answer. This segment is growing rapidly, both in new customers and in revenues (42%). Notable customers are Uber (UBER), HDFC and ICICI Bank, Flipkart, Google (GOOG), IKEA, and Coca-Cola (COKE).

This is a very positive point in my view, as the business is making a transition to be more recurring and less dependent on macro changes.

The big ad business is more volatile, dropping 12% in 2023, but overall looking forward, it is projected to grow significantly. While businesses won’t cut Google ads and Facebook (META) ads in tougher economic environments, they will cut on less essential marketing platforms such as Truecaller. However, once the macro changes, we should expect much higher growth rates than now. Consider, for example, the growth before high interest rates; it is a CAGR north of 40%. The target was 45%, but the economic downturn wasn’t in their plans. That’s why the transition towards recurring revenue is a good choice.

What I like about the business, besides the growing consumer base (11% monthly users), is that the business has endless opportunities to increase revenues. Whether it is increasing ad efficiency, converting more people to subscriptions, increasing ad prices, increasing users’ time in the app, and more. The user base is huge, but despite that, it is not a big market to be looking into by big players. That leads me to the next point, the moat. I think Truecaller has a nice moat. In my view, the big players are in an innovator’s dilemma here. The market isn’t big enough for them to notice. Truecaller is a massive leader, and it has only 1,730 SEK revenue (about $170 million); the market is small for them to allocate resources. Beyond that, I believe being the largest gives Truecaller a nice advantage. Essentially, this is a safety app. Which would you choose, the one with 1 billion downloads or the one with 5 million? The answer is clear to me. Moreover, there is another barrier in the form of a database:

As Truecaller was very early to develop its offering, there is a limited threat from new players in the Caller ID market because privacy-focused policies for mobile operating systems are preventing competitors from rapidly developing the necessary ID database. Truecaller’s database includes more than 5.9 billion identified consumer and business phone numbers. It was built through the Truecaller community and machine learning technology in all parts of the world where the app has been used Truecaller began doing business. The Truecaller database identifies more than 95 percent of all calls globally in 2022.

Moreover, the market favors Truecaller. According to Truecaller, smartphone use is accelerating rapidly, driven by large increases in the number of users in emerging markets. Better connectivity has made it easier to reach smartphone users, which is exploited by scammers and telemarketers, leading to negative and potentially harmful experiences for mobile users all over the world. Furthermore, additional macro factors include growth in population and average lifespan, especially in India, where most of Truecaller’s business is conducted, increased spam volumes, and greater awareness of Caller ID apps.

Leadership

Truecaller is founder-led, with both founders serving on the board. One of them, Alan Mamedi, is the CEO. Together, they hold about 15% of the company and possess 60% voting power. They also take low wages, which is a positive point in my view.

I like the management because I believe they make wise decisions, leading the business towards recurring revenue streams, targeting emerging markets, and especially in capital allocation. They bought around 8% of the outstanding shares last year. I favor buybacks, especially when the business is believed to be undervalued. They have stated they don’t intend to pay dividends and will continue to pursue buybacks to boost EPS. The mergers and acquisitions they undertake are small, which I consider wise, as most M&As fail.

Numbers

Another reason I consider it a gem is the capital efficiency of this business. It boasts almost 30% return on invested capital and a 34% return on capital employed. Moreover, the business exhibits high operating leverage, meaning that with growth, we should see margins accelerate, and the bottom line growing at a faster rate.

The free cash flow generation is superb, nearly matching the EBIT numbers without stock-based compensation. However, the margins are higher than the long-term target. Adjusted EBITDA is at 41%, while the target is 35% and above. This is because management stated in the earnings call that they will ramp up investments in the business to support recurring revenue.

Speaking of growth, analysts expect high single-digit growth in 2024, followed by a jump of 28% in 2025. I believe those numbers are achievable, although management refuses to give guidance. I think it is achievable because the two combined – recurring revenue streams growing more than 30% and constituting about 25% of total revenues – along with the potential high growth in ad revenue, present a double-digit top-line growth business with operating leverage, all at less than 20 times earnings. Rare, isn’t it?

I want to emphasize again the buybacks. Reducing the share count by 8% in a year is an amazing return to shareholders. It adds growth to the bottom line, on top of the organic growth. Now, 8% is extreme, but the market won’t be apathetic towards smart buybacks for a long period. Eventually, the EPS will appear too good to be true at this price, and then the buybacks won’t be as effective.

Risks

The risk I see here is that smartphone manufacturers, telecom operators, and suppliers of smartphone operating systems will assimilate built-in software into their phones. Based on the necessary ID database, that would be a big task, and I don’t know if the big players have the incentives to do so, as noted, the market is small. But I wouldn’t underestimate it.

Another risk is dependency on India. Seventy-three percent of revenues are from India. As we see now, a slowdown in ad spend there will affect growth.

Truecaller is also popular in emerging markets, where economic stability is low; therefore, ad spending there could be volatile.

Another risk is that the OTC stock is very illiquid.

And another risk is that the stock needs a catalyst to jump. The momentum has been negative since the IPO, and further sales could happen.

Valuation & Conclusions

In my view, paying 18 times LTM PE for a business that can grow double digits top-line is not expensive, maybe even cheap, especially given the capital efficiency, strong FCF, and good capital allocation. FCF yield is also almost at 5%, with no SBC (2023) boosting cash flows.

If the business could accelerate growth to the 20% area, maybe more with margin growth and buybacks, we have a potential under 1 PEG ratio, which is cheap for a 30% ROIC business.

Let’s do a DCF: estimating analysts’ growth for the first three years, and then 15% growth top-line (under past numbers) along with 38-40% EBIT margins, WACC (calculation on the 2nd spreadsheet) of 11.9%, and 3% terminal growth, we have an undervalued company by 22%. If we assume the current EV/FCF exit multiple of 20, we have a stock undervalued by more than 70%. I think this is a fair price for this high-quality business.

In my view, this undiscovered gem is a big opportunity. It is not familiar to Seeking Alpha investors as well as Fintweet. I think it has great potential for multiple expansions. But there are risks; the ad picture is not clear at the moment, and the stock is in a bad momentum.

Looking forward to your comments.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.