Shares of Karooooo Limited (KARO -16.51%) fell on Wednesday, declining 16.5% on the day.
Karooooo is a leader in telematics and data software for truck fleets across South Africa, Southeast Asia, and Europe, with a strong and profitable subscription model.
On its fiscal second-quarter 2026 earnings reported today, Karooooo showed impressive revenue growth, but that growth appeared to come at the expense of margins.
Karooooo's stock had rallied a lot over the past couple of years, so disappointment on the profit side led to a substantial sell-off today.
Karooooo accelerates growth, but it's not enough for investors
In the fiscal second quarter, Karooooo grew revenue 21%, while adjusted non-GAAP (generally accepted accounting principles) earnings per share rose only 13% to ZAR 8.28 per share ($0.48 in U.S. dollars).
While some of the shortfall in earnings per share was due to withholding taxes on dividends the Cartrack and Karooooo Logistics operating businesses paid back to the parent holding company, Karooooo also saw its gross margin shrink by three percentage points relative to the prior year to 72%, contributing to the bottom-line shortfall.
Yet while the profit shortfall caused a sell-off, Karooooo was able to reaccelerate top-line growth. Annualized recurring revenue growth was 20% in the second quarter, which marks a continued acceleration over fiscal 2025's 17% ARR growth, fiscal 2024's 15% growth, and fiscal 2023's 13% growth.
Therefore, it could be that Karooooo is putting its pedal to the metal, lowering prices in order to drive overall top-line growth and market share gains. Management has noted it still sees a large opportunity, not only in South Africa, but especially in the lower-penetrated Southeast Asia geography. Therefore, management may see bigger growth opportunities at the expense of current-quarter profitability.
Image source: Getty Images.
Karooooo is worth a look
Even though today was a bad day for the stock, Karooooo is a highly attractive business. Based on the software rule of 40, a threshold that marks attractive software businesses whose revenue growth and earnings before interest, taxes, depreciation, and amortization (EBITDA) margins add up to more than 40, Karooooo well exceeds that, with its main Cartrack segment exceeding a rule of 60 today, with 20% growth and 46% EBITDA margins.
After today's selling action, the stock has fallen back to a valuation around 25 times earnings, which is a pretty good value for a stock with that combination of high growth and margins. While investors should keep an eye on gross margins, it appears this sell-off is likely a good buying opportunity.
