Episode summary
OTC Markets (OTCM): A Picks and Shovels Play in Modern Capital Markets
The Intrinsic Value Podcast
· · 1 hr 21 min · Hosts: Kyle Grieve, Shawn O’Malley
Summary
OTC Markets Group is a toll-collecting piece of market infrastructure that sits behind over-the-counter trading, corporate listings, and market data. The hosts argue that this makes OTCM a quasi-monopoly: if a company cannot or does not want to list on NYSE or NASDAQ, OTCM often becomes the default venue, and that positioning has helped it compound revenue, profits, and free cash flow at double-digit rates for a decade.
The discussion centers on three segments: OTC Link, which facilitates quoting and trade messaging; Corporate Services, which sells tiered listing and disclosure services; and Market Data Licensing, which monetizes the proprietary data generated by the platform. The hosts emphasize that the business is highly recurring, capital light, and surprisingly profitable, with roughly 130 employees supporting more than 12,000 securities.
The main caution is regulatory risk. The hosts say OTCM’s moat depends heavily on SEC and FINRA rules that keep larger exchanges from serving many of OTCM’s issuers. They also note that newer products like Moon ATS and the company’s data licensing growth could help, but the business remains vulnerable if rules change or if customer concentration in data licensing worsens.
Key takeaways
- The hosts say OTCM is a quasi-monopoly because many small and foreign issuers have no realistic alternative to OTC markets for U.S. access.
- OTC Markets’ three segments have all grown over the last decade, with revenue, profits, and free cash flow compounding at 11%, 13%, and 14% annually, respectively, according to the hosts.
- Corporate Services appears to have pricing power: the hosts cite OTCQX annual fees rising from about $15,000 pre-2017 to roughly $23,000 in 2021 and higher since.
- The hosts argue OTCM is capital light, with about 130 employees, minimal capex, and no debt since 2016.
- Regulatory change is the biggest existential risk, especially if the SEC lets NYSE or NASDAQ serve non-listed issuers or forces more direct SEC registration.
Notable quotes
“That company is OTC Markets. And here's a wild fact. The platform they run covers over 12,000 securities, more than both major exchanges combined”
“OTCM also has a very rich history. though its current CEO Cromwell Coulson bought Pink Sheets with an investor group way back in 1997 to bring the business into the digital age”
“OTCM has displayed some very nice operating leverage throughout the years”
“So, the business has a very solid relationship right now with the SEC, but there really is nothing stopping the SEC from altering regulations to just make them a lot less favorable for OTCM if they wanted to”
How the episode opens
Every time you buy a stock that doesn't trade on the New York Stock Exchange or NASDAQ, a foreign company, a small cap, a pink sheet name, there's a company in the background collecting a toll. You've probably never thought about them and they've never thought about making you think about them. That company is OTC Markets.
And here's a wild fact. The platform they run covers over 12,000 securities, more than both major exchanges combined. Yet, the whole operation runs on fewer than 130 people.
Today, we find out how a business that most investors have never even heard of has quietly compounded free cash flow at 14% annually over a decade and whether it can continue doing it. Hey folks, today we will continue our hunt for intrinsic value by going deep into the infrastructure and operations that underpin financial markets with a company called OTC Markets Group. But if you've ever invested in the US in companies not listed on the New York Stock Exchange or NASDAQ, there's a pretty good chance whether you realize it or not that you've come across OTC markets before where OTC stands for overthe-counter.
And in market cap terms, it is a small company. I think it's fair to say it is a hugely important role in the financial system and that has enabled the company to generate some really eyepopping financial results.
That's right. So I remember listening to one of Mon Pay's chats a number of years ago where he said that one of his favorite ways of finding a new investment idea was to simply just find a wide moat business in one country that was being applied to yet another country. Now OTC markets doesn't quite fit this bill as it's operational in the US but it's among a very small number of capital market infrastructure plays that are available and it has very very unique competitive advantages.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- otc market infrastructure
- monopoly pricing power
- regulatory barriers to entry
- unit economics
- capital allocation
Companies and tickers mentioned
- OTCM
- OTC Markets Group
Watch the episode
Watch “OTC Markets (OTCM): A Picks and Shovels Play in Modern Capital Markets” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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