📈 Results OTC Markets
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Today we’ll give an update about the full-year results of OTC Markets.
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OTC Markets published its full 2023 results this week.
Let’s dive in and update our investment case.
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OTC Markets
OTC Markets can be seen as the ‘NYSE for smaller companies’.
The company makes money by trading over-the-counter securities and providing market data.
Results
The beautiful thing about their business model is that 85% (!) of their revenue is recurring in nature.
In 2023, OTC Markets’ revenue increased by 5% to $109.9 million.
Results per segment
OTC Markets is active in 3 segments:
Corporate services (43% of revenue):
Allows companies to trade publicly without the complexity and cost of a national securities exchange list.
Revenue in this segment decreased by 2%
Market data (39% of revenue):
Providing market data to professionals and non-professionals to allow them to make better informed investment decisions
Revenue in this segment increased by 19%
OTC Link (18% of revenue):
Connecting brokers, organizing markets, and incentivizing disclosure to provide smooth market trading
Revenue in this segment decreased by 6%
Some part of OTC Market’s business model is cyclical. And they are (slightly) suffering from this right now.
However, we are still satisfied with OTCM’s results and the way it reports (honestly and transparently).
Great capital allocation strategy
Their capital allocation strategy looks great:
High insider ownership and excellent culture
Insiders still own 42.4% of the company (a great sign). This means the company has skin in the game.
OTC Markets has an excellent company culture:
“As a market operator, we are expected to stay ahead of evolving regulatory expectations, as we comply with the letter and principle of laws and rules.”
“Incentives matter at OTC Markets. All employees receive stock options upon joining, to encourage everyone to think and act as an owner.”
“There have been no changes in control of the Company since 1997.”
Earnings call
The earnings call was also really interesting.
Here are some key takeaways:
95% retention rate:
“For the annual OTCQX subscription period that began on January 1, 2023, we achieved a 95% retention rate compared to 96% in the prior year. The retention rate for the annual OTCQX subscription period beginning January 1, 2024 was 93%.”
International expansion offers opportunities:
“International expansion is a big opportunity for us. International across all of our business lines is a big opportunity and all of those support each other.”
Not giving forward expectations:
“We don't give forward expectations. I mean, my view is that successful companies over the long-term drive organic growth, and organic growth is going to come from a mix of three things. It's going to come from user and usage growth. It's also going to come from a value increase to the client that you can reflect in prices and that's what I would call stuffing the visible client value and then the third is new product development.”
Returning capital to shareholders:
“During 2023, we returned a total of $29.9 million to investors in the form of dividends and through our stock buyback program, an increase of 3% over the prior year. We remain focused on growing our business and delivering long-term value to our stockholders.”
Update investment case
Now let’s update our investment case.
For those who missed it, you can read the full case here:
Earnings Growth Model
In theory, it’s really easy to calculate your expected return:
Expected yearly return = Earnings growth + shareholder yield +/- multiple expansion (contraction)
We make the following assumptions:
OTCM can grow its earnings by 10% per year over the next 5-10 years
The shareholder yield is equal to 2.8% (dividend yield of 4.0% minus yearly dilution outstanding shares of 1.2% due to SBCs)
The valuation is fair (forward PE: 21.2x) so no multiple expansion/contraction will take place
Under these assumptions, we get the following results:
Expected yearly return = 10% + 2.8% + 0.1*(21.2-21.2)/21.2 = 12.8%
An expected yearly return of 12.8% per year sounds satisfying to us.
Reverse DCF
Charlie Munger once said that if you want to find the solution to a complex problem, you should invert. Always invert. Turn the problem upside down.
A reverse DCF shows you the expectations that are implied in the current stock price.
You try to determine for yourself whether these expectations are realistic or not.
You can learn more about a reverse DCF here: Reverse DCF 101.
The current stock price is equal to $57.5 and OTC Markets has 11.9 million shares outstanding.
We want to achieve a yearly return of at least 10% (the discount rate we use). We use a base free cash flow of $32.3 million (expected FCF 2024 minus stock-based compensation).
Under these assumptions, OTC Markets should be able to grow its free cash flow by 9.1% per year over the next decade to return 10% per year to shareholders.
Over the past 10 years, OTCM has grown its FCF at a CAGR of 14.5% per year and we believe the company can grow its FCF by at least 10% per year in the near term.
As a result, the company still looks undervalued.
Conclusion
OTC Markets is an excellent Owner-Operator with more than 40% insider ownership and an excellent culture.
85% of the company’s revenue is recurring in nature. The other part of the business is somewhat cyclical. It depends on the state of the economy (the better, the more people are interested in stocks).
Currently, the cyclical part of the business isn’t performing well but we don’t worry about this as a long-term owner of the business.
The valuation of the company still looks attractive as our Earnings Growth Model indicates an expected yearly return of 12.8%.
OTC Markets currently trades at $57.5 and the buy-below price is equal to $61.8. This means we still consider the company as worth buying today.
We are proud to own OTC Markets and think the company will continue to do well in the future.
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Happy Compounding!
Pieter (Compounding Quality)
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Used sources
Interactive Brokers: Portfolio data and executing all transactions
Finchat: Financial data