The stock market today offers investors a plethora of compelling portfolio candidates to take advantage of the Internet of Things -- that is, the trend of adding internet connectivity to everyday things in our lives -- ranging from early-stage businesses to massive, well-established tech juggernauts.
Let's explore the merits of two of the most popular IoT plays, then, that happen to sit at opposite ends of that spectrum: CalAmp Corp. (CAMP +0.00%) and Cisco Systems (CSCO 0.23%). So which is the better buy for investors today?
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Volatility and room to grow
First up, CalAmp is still a relatively small company with its entire market capitalization just below $550 million as of this writing. CalAmp focuses primarily on the fast-growing niche of wireless machine-to-machine communications technology, such as vehicle telematics applications (think fleet management, usage-based insurance, crash notifications, and stolen vehicle recovery), train and rail communication networks, supply chain management, and construction asset management.
And CalAmp is aggressively expanding its scope. In construction, for example, CalAmp already boasts an enviable relationship providing equipment telematics to Caterpillar. And management has stated that they're hard at work planting seeds to form similar relationships with other heavy equipment leaders going forward -- a promise that could be accelerated by last month's launch of CalAmp AssetOutlook, a next-gen telematics application specifically aimed at optimizing construction operations for both off-road equipment and on-road vehicles.
Earlier this year, CalAmp also announced its entry into the multibillion-dollar cold chain and supply chain visibility markets. Using a combination of GPS, RF beacon sensors, tracking devices, and its new SC iON Command Portal -- collectively dubbed "CalAmp Supply Chain Integrity" -- the company aims to help customers improve supply chain performance and meet regulatory compliance requirements across a variety of industries from healthcare to food, biotech, pharma, and other consumer goods.
Of course, these are only a few examples of the large number of potential applications for CalAmp's technology. But they're also indicative of the fact that CalAmp's growth is still in its early stages. As a result, CalAmp stock also tends to be volatile, particularly as the market reacts to whether its quarterly results live up to Wall Street's expectations. CalAmp's results are also susceptible to macroeconomic headwinds, which can discourage its customers from pushing forward with its next-generation technology in the near term.
Thankfully for investors today, CalAmp management last quarter indicated that much of the macroeconomic issues that held back its business in recent quarters -- revenue last quarter climbed just 11.6%, to $83.4 million -- have largely passed. We should get a clearer picture of whether that's still the case when Calamp releases its fiscal fourth-quarter results next week on April 18, 2017. But with shares down around 10% over the past year, it could be the perfect opportunity to pick up shares.
The industry giant
Meanwhile, Cisco Systems lumbers into our comparison as a networking industry juggernaut with a market capitalization of $161 billion -- or more than 290 times the size of CalAmp -- as of this writing.
Perhaps unsurprisingly, Cisco has struggled to find top-line growth as it works to diversify its business away from networking switch and router sales, and toward more recurring revenue sources from software and services. Cisco's revenue declined 2% year over year last quarter, to just under $11.58 billion, including a 4% decline in product revenue (to roughly $8.49 billion), and 5% growth in service revenue (to $3.09 billion).
But Cisco remains solidly profitable amid this transition. Adjusted net income declined roughly 2%, to $2.9 billion last quarter alone, while earnings per share remained flat at $0.57. At the same time, Cisco generated staggering free cash flow of more than $3.5 billion over the last three months. As such, Cisco isn't afraid to pursue growth opportunities through acquisitions -- most recently including its $3.7 billion deal to acquire application intelligence software company AppDynamics in January.
That healthy cash flow and profitability also gives Cisco the flexibility to deliver ambitious capital returns. The company repurchased 33 million shares of common stock for roughly $1 billion last quarter, leaving a staggering $13.4 billion remaining under its existing buyback program. Cisco also increased its dividend last quarter by $0.03, to $0.29 per share. For perspective, Cisco's dividend has more than tripled since the middle of 2012 and, at today's stock price, offers a healthy annual yield of 3.6%. And in contrast to CalAmp's struggling shares, Cisco stock has climbed 17% over the past year as investors cheered the progress in its transition so far.
The verdict
So which is the better buy? I think that comes down to your preferences as an investor. On the one hand, CalAmp delivers the prospect of a smaller business that's still early in its long-term growth story. But CalAmp shareholders should be prepared for more volatility along the way. On the other hand, Cisco Systems offers relative stability and impressive capital returns, but its runway for growth is inevitably shorter from its larger base even as it continues to make progress in its transition to more recurring revenue sources.
To that end, I'm more than comfortable with the risks and volatility of owning CalAmp, and look forward to the visibility we should get from its quarterly conference call next week. Assuming the worst of last year's macro headwinds are indeed behind it, I think CalAmp is more likely to deliver market-beating returns going forward.
