Conservative perhaps, but I'd note that Iteris is basically building this business from the ground up. Even though the revenue base is tiny today, the ag business is already generating gross margin close to 40%, and I believe this can be a very profitable business at scale (an 80% gross margin target is not unreasonable). I expect margins from the traffic business to offer less upside, though greater adoption of data-driven systems could offer some scale opportunities. The key issue with modeling Iteris, then, is estimating how large the ag business will get. I suspect most investors would be deeply disappointed if this is just a $20 million business in FY 2021 and less than a $100 million business in a decade, but that would still have the company on a trajectory to double-digit FCF margins and a fair value over $6. At over $200 million in revenue, though, the FCF margins can move closer to 20% and the fair value can move into the double digits. Of course, if the ag business can't produce a long-term CAGR above 20%, the fair value can drop into the $3 range pretty easily. The Bottom Line I like how Iteris has been signing on ClearAg subscribers, and although precision ag's status as a new hot topic makes me nervous, this is an interesting opportunity. The limited amount of due diligence I've been able to do leads me to think this could be a viable competitor and the financial upside is impressive. I want to emphasize, though, that this is a really speculative idea. I don't think the traffic business alone can support a higher valuation, so it all comes down to management's ability to execute in the emerging precision ag market. As a risky and speculative idea, I think it's worth consideration, but the operating track record here is minimal and the challenges to growing that business are many, varied, and significant. This article is part of Seeking Alpha PRO . PRO members receive exclusive access to Seeking Alpha's best ideas and professional tools to fully leverage the platform. Disclosure: I am/we are long MON. I wrote this article myself, and it expresses my own opinions.
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