My understanding of route’s business summarized in a few points:
- Route of today: looking backward (TTM revenue) route definitely has elements of being a commoditized service.
- Opportunity size: There is a huge opportunity for creating value added services. The sector itself is growing at 30%. To take the moat analogy forward, imagine if two castles are present in 2 geographically different locations separated by 1000s of KMs. Then, is there really a need for a moat? There certainly is some probability the castles might end up fighting each other, but there is also some probability that they might look to expand into moon, Mars or the space in general. The opportunity size is huge. There is always space for K large companies to co-exist.
- Switching costs based moat: B2B IT always has some switching costs. Going by the logic you are using to describe route, one would conclude that Infosys and tcs have no moat either. But imo, some company having a moat is not a Boolean, moatness is a spectrum and every company has some moat. The fact that route have integrated with 100s of providers and enable their clients to consolidate vendors from 100s to 1 is itself remarkable. 1:1 migration is almost never possible. Route would optimize for their customers. Co-develop. If Google thinks of nigeria as a big opportunity and wants route to integrate with providers in Nigeria, route would happily do that. Once route does that bespoke development, how easy would it be for some new competitor to come and offer exactly same things which route is offering, and at a lower price? In my opinion, this is difficult. The customer relationship is indeed sticky in nature and hence upsell opportunities are going to be massive. Which brings me to my last point.
- Build a highway before you build a resort by its side: communication infra is at such a nascent stage that route should currently be thought of as being akin to an infra player. They are building a communication highway that all clients can use. However, there is immense opportunity and optionality for them to forward integrate into the higher layers built on top of the communication layer. When they are able to develop smart customer experience as a service platforms, then the margins would expand, the moat would widen, integration would deepen and replicating route’s experience would become much harder for competitors. Valuations are always a forward looking exercise. One has to think about what the picture will look like in the future. The dhandha series videos do a good job of that, specially the second video. The future is going to be CPaaS enabled. The very fact that route is able to compete and win internationally shows the strength of their sales and technical service.
- Biggest
: For me, the biggest missing piece in the puzzle is as follows: how is route able to win customers when they compete with international competitors like twilio for end user markets such as Europe which are high margin for the clients ? Is it purely based on lower opex (due to labor arbitrage and infra being less expensive)? What is that secret sauce which allows them to win new clients against their competitors? Is it the first mover advantage that they enjoy, their large existing integration with 100s of telecom providers? Is it the management’s foresight that led them to build IP based solutions based on what’s app and viber?
Disc: have small quantity invested and still learning. My understanding is based on latest interviews, the dhandha interviews, last few concalls. Still learning more. Have not read the rhp yet.
A play on route is a play on the sector imo. If route builds differentiation it would be a bonus.