Karooooo’s stock has increased in value by more than 140% over three years. (Photo: Cheng Xin / Getty Images) Karooooo is big on vowels and even bigger on growth. Over three years, this stock has increased in value by more than 140% — a return that I’ve thoroughly enjoyed watching in my portfolio. If you include dividends, the return over three years is more than 160%.
Sure, you can cherry-pick different dates and get different answers. The five-year view isn’t quite as spectacular as the aforementioned numbers, but a total return of roughly 100% over that period is still nothing to be upset about.
Importantly, the momentum in 2026 has been encouraging, with a year-to-date share price increase of 28%.
The market clearly likes Karooooo, but why? And is it really worth a price/earnings multiple of nearly 30x?
The first question is easier to answer than the second.
A SaaS model that isn’t broken
Karooooo’s main business, Cartrack, exhibits many of the characteristics that have been associated with software-as-a-service (SaaS) businesses over the past decade.
And unlike many SaaS names, Karooooo isn’t being disrupted by AI. For now at least, we live in a world where robots can’t respond to your car being hijacked. That Terminator-esque world is some way off — and that’s probably a good thing!
The first ingredient for success in SaaS is a wide base of subscribers. With operations in South Africa and abroad, Cartrack has now reached 2.8 million subscribers. That’s an impressive increase from almost 2.4 million subscribers a year ago. A subscriber base of this nature creates a diversified stream of revenue that has no key customer dependencies whatsoever.
The second ingredient is growth in revenue, not just the size of the user base. With subscription revenue up by 19% vs subscribers up by 18%, Karooooo has shown a small increase in average revenue per user (Arpu). Unlike most of the SaaS names out there, Karooooo isn’t having to cut prices to grow, so that’s another tick in the box.
The third ingredient must be profitability, as there’s no point in having a diversified revenue stream that doesn’t lead to rewards for shareholders. Cartrack’s operating profit increased by 16% in the latest quarter to a record R395-million, so we can safely give that the nod as well.
Eagle-eyed readers may notice that operating profit margin must have contracted, as the growth in operating profit is lower than the revenue growth. Indeed, margin did decline from 30% to 28%, but there are good reasons for this.
A core element of the Karooooo model is that it needs to invest ahead of growth. In other words, it needs to build capacity in a particular market before it can show meaningful subscriber growth. This is as simple as hiring sales staff and incurring other infrastructure costs in anticipation of growth.
The net result? An operating margin that rises and falls based on the exact timing of the cost investment vs. the revenue growth. This volatility is more pronounced on a quarterly basis rather than over six months or a full financial year.
Logistics optionality
Having an additional growth engine is a good thing, provided it doesn’t distract management from the core operations. Karooooo did go down a weird path at one point of trying to get involved in used car sales, but wisely shut that down after a short and unsuccessful stint.
These days, the business in the group that falls outside of the Cartrack stable is the Karooooo Logistics delivery-as-a-service (DaaS) business, proving that there’s a tech acronym for everything.
Strategically justifiable based on a Venn diagram of mobility and telematics, this DaaS business is carving out a tasty niche for itself in the group. Revenue increased by 46% year-on-year in the latest quarter. Although it’s still quite small in the group context (a contribution of R177-million of R1.35-billion group revenue), that growth rate suggests that the importance of this business will increase over time.
The concern for the DaaS business is the operating margin, which currently sits at just 8% (flat year-on-year). Despite the business having grown significantly over the past 12 months, there’s no meaningful improvement in margin. With Cartrack’s operating margin usually hovering around the 30% mark, outsized growth in DaaS will dilute group margin over time if things continue like this.
But what about the cash?
Those with a negative view on Karooooo could point to free cash flow as a questionable metric. It does tend to bounce around, as Karooooo needs to invest in telematics devices to drive revenue.
Even where subscription revenue keeps pace with investment in devices, this is a drag on cash flow. And where there’s a build-up in devices ahead of revenue growth, there can be a significant decrease in free cash flow despite strong growth in profits.
That’s exactly what happened in the latest quarter, with free cash flow plummeting from R338-million in the comparable quarter to just R60-million in this quarter.
For those who are bullish on Karooooo, like me, our view would be to avoid drawing any conclusions based on volatile quarterly numbers. Instead, judge the business based on longer time periods that aren’t as dependent on the exact timing of investment in devices.
A P/E multiple of 30x feels high
On the JSE, quality stocks trade above 20x earnings. It’s rare for a stock to get all the way up to 30x. It’s especially rare for such a multiple not to move back down into the mid-20s.
There’s been a lot of bad press recently around Cartrack’s working conditions, but Karooooo as a whole remains a very strong company with solid fundamentals. Still, a 30x multiple doesn’t leave much room for multiple expansion, with the risk being that the stock trades sideways as earnings growth is offset by the multiple unwinding.
With a 52-week low of R720.51, the current price of R1,060 (a new 52-week high) looks ripe for a correction. I’m not adding to my position at these levels, as there’s a good chance that better entry points will present themselves.
But I’m not selling either, as I believe that Karooooo can still deliver growth for many years to come. DM
Disclaimer: the writer holds shares in Karooooo.