The Most Expensive Stock Behind the Internet of Things Worth Buying

By Markets Fool.com

The Internet of Things -- where formerly unconnected devices become connected and start to collect and communicate data -- is growing fast. Nearly 50 billion "things" will be connected to the Internet by 2020, according to Cisco Systems, and IDC says revenue from the Internet of Things, or IoT, will top $7 trillion that same year.

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Among small tech companies making big plays in the IoT, there's one stock that seems expensive right now, but I think is still worth buying. CalAmp makes wireless technology for machine-to-machine communications -- including wireless monitoring for heavy equipment company Caterpillar -- and its solid financials and future opportunities mean it still has lots of room to grow.


CalAmp's tech allows companies to monitor heavy equipment. Source: CalAmp.

Why is it so expensive?
To keep things simple, let's define "expensive" using the company's price-to-earnings ratio. Right now CalAmp's trailing 12-month P/E ratio is 52.22, which means its stock price is trading at more than 52 times the company's earnings per share, or EPS.

But to get a better understanding as to why that means CalAmp's stock price is expensive we need to compare it to two things: the P/E ratio of the technology industry and the P/E ratio of other IoT stocks.

The average P/E ratio of stocks in the tech industry is just under 16, which is considerably lower than CalAmp's 52. But here's how CalAmp's P/E ratio compares to handful of companies that are making Internet of Things technologies as well:

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Company

P/E Ratio

CalAmp

52.22

Freescale Semiconductor

48.39

NXP Semiconductors

45.14

Ambarella

43.18

Source: Yahoo Finance.

It's worth pointing out that NXP is buying Freescale, which would alter the numbers above.

While CalAmp's P/E ratio is clearly higher than all of the IoT stocks above, it isn't actually that much higher. So while CalAmp's stock is expensive compared to the entire tech industry, it's not so high when we look at it alongside other Internet of Things companies.

Why CalAmp's still worth buying
High P/E ratios don't have to be a bad thing, as long as the company has a strong financial footing and lots of opportunity to expand revenue.

Right now CalAmp has just $774,000 in debt -- which is very low -- and has $36.93 million in cash. That doesn't sound like a lot of money, but remember that CalAmp has a market cap of just $674 million.

Low debt and solid cash on hand is a great thing for company's financial stability, but what about its future outlook?

If we look at the company's forward P/E (the expected price to earnings for the coming 12 months) things look even better. CalAmp's forward P/E is just16.35, meaning that over the next 12 months the company's revenue should grow quickly enough to drop its P/E down near the tech industry's average.

This helps too
CalAmp's key revenue generator is its Wireless DataCom segment, which represents about 86% of the company's business right now -- and it's moving in the right direction.

Revenue growth from the business was up 10% year-over-year in the most recent quarter ending, and the company expects it to grow even faster next quarter.

CalAmp's Wireless DataCom business is engrained in the IoT, and the company is poised to benefitas Caterpillar and other heavy machinery companies add more wireless connectivity to their equipment. Revenue from Caterpillar deals are expected to jump 40%-50% in the fourth quarter, and CalAmp CEO Michael Burdiek expects additional heavy equipment companies "could become significant growth drivers for CalAmp over the coming quarters and years."

Between CalAmp's current revenue growth, new business that's already starting to materialize, and its solid financial position, I think the company's an expensive Internet of Things stock that's still worth buying. Investors should keep in mind that small-cap stocks like CalAmp can be volatile, so keep a strong stomach and look for long-term potential for this one.

The article The Most Expensive Stock Behind the Internet of Things Worth Buying originally appeared on Fool.com.

Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Ambarella, Apple, CalAmp, Cisco Systems, and NXP Semiconductors. The Motley Fool owns shares of Ambarella, Apple, and NXP Semiconductors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.