Shares of CalAmp (CAMP -4.39%) rallied nearly 50% this year, while the S&P 500 gained only 20%. The wireless communications solutions provider beat analyst estimates on both the top and bottom lines over the past four quarters, and analysts expect its revenue and earnings to respectively rise 4% and 9% this year.
CalAmp primarily serves the automotive and industrial Internet of Things (IoT) markets with its stationary and mobile telematics solutions, which remotely track, analyze, and control vehicles and machinery. CalAmp tethers those machines to its cloud SaaS (software as a service) solutions.
Demand for CalAmp's services is rising, and will likely keep climbing over the next five years. Let's take a look at its key growth strategies, and whether or not they'll bear fruit.
Expanding its gross margins
Back in fiscal 2010, CalAmp primarily sold IoT hardware and DBS (direct broadcast satellite) solutions. By 2016, its focus had shifted to global telematics products and services, and it gradually phased out its DBS business. In 2017 and beyond, CalAmp is pivoting again toward "connected asset ecosystem solutions," which sync its products over its cloud platform.
CalAmp has repeatedly pivoted its business to expand its gross margins -- hardware components have lower margins than telematics solutions, while telematics solutions have lower margins than cloud services. The impact of those strategic shifts on its gross margin is easy to see:
Therefore, as CalAmp's cloud ecosystem expands, investors can expect margins to keep expanding. CalAmp's software and subscription services revenue accounted for 17% of its top line last quarter, a percentage which should rise over the next five years.
The growth of the connected car market
Last year, CalAmp acquired LoJack, a producer of vehicle theft recovery systems and advanced fleet management solutions. By tethering LoJack's customers to its own Telematics Cloud, CalAmp significantly increased its presence among auto dealers, commercial fleets, law enforcement, consumer vehicles, insurance carriers, and wireless carriers.
Scaling up and adding more software subscribers, which hit 689,000 last quarter, locks in clients while strengthening the company's gross margins. Research and Markets estimates that the overall connected car market will grow from 5.1 million shipments in 2015 to a whopping 37.7 million units by 2022. This means that CalAmp's connected car business has plenty of room to run.
The growth of the Industrial IoT market
Meanwhile, Grand View Research estimates that the global Industrial IoT market could grow from $100 billion in 2016 to $934 billion by 2025. The firm expects that growth to be driven by the ability of IoT solutions to cut costs, improve efficiency, and accumulate actionable data for big companies.
One of CalAmp's top customers is Caterpillar (CAT 0.51%), the industrial equipment giant which roared back to growth over the past three quarters on stronger worldwide demand and tighter cost controls. Analysts expect Caterpillar's revenue to rise 15% this year and another 9% next year.
A growing dependence on overseas markets
Like Caterpillar, CalAmp is increasingly dependent on overseas markets. Its international revenue rose 90% to $91 million last year, and accounted for 26% of its top line. That's up from 17% in fiscal 2016.
That percentage should rise even more over the next five years, but it could be a double-edged sword. Robust growth in emerging markets would significantly boost CalAmp's revenues, but a global slowdown -- like the one which hurt Caterpillar for several years -- could take a bite out of its top line.
The key takeaways
The IoT market is a massive one. Some sectors, like industrial machines and connected cars, are growing at more reliable rates than other sectors, like wearables or home automation products.
CalAmp is heavily exposed to the industrial and automotive markets, and its strategic shift toward cloud-based telematics should lock in customers and lift its margins. I believe those catalysts make the company a great long-term play on the IoT market.