Finance Ghost: AI-driven memory costs impact Karooooo’s free cash flow

With a market cap of over R32 billion, an offshore expansion into new growth markets, and even a listing on the Nasdaq, Karooooo is recognised as one of South Africa’s better corporate exports.

But the Cartrack owner’s roots are still in its home country, as nearly 2.2 million of the 2.9 million total Cartrack subscribers are in South Africa(1). This market hasn’t matured yet, evidenced by the 18% growth in the local subscriber base in the latest quarter.

The combination of strong growth rates and a recurring subscription revenue model has contributed to the market currently valuing Karooooo on a relatively high Price/Earnings multiple of nearly 30x(2).

Aside from the risks created by a high valuation multiple and related expectations, there are the usual operational risks linked to being a global business in a competitive market.

And in recent quarters, a new risk has emerged.

Revenue is the “easy” part

Before we get to the latest challenge, it’s worth understanding how subscriber growth filters down through the income statement. The easiest part of the business to understand is the revenue line.

The core operation is Cartrack, which sells subscription-based services related to fleet management and vehicle recovery.

The major revenue growth driver is subscriber volume. But revenue growth can differ from subscriber growth for reasons ranging from price increases, mix effects and currency impacts through to the relative success (or failure) of other value-added products.

For example, the latest period saw 20% subscription revenue growth, ahead of the 18% increase in the total number of Cartrack subscribers. Management partially attributed this additional growth to the Video and Cartrack-Tag products sold to existing and new customers. This shows that there’s a value-added services opportunity layered on top of volume growth. Success in cross-selling these products plays a role in the relationship between subscriber growth and revenue growth.

An important point to note is that as the subscriber base becomes larger, so too does the number of net new subscribers needed to maintain a particular growth rate. This is the challenge of scale, as it’s usually more difficult to achieve rapid growth at a larger company than a smaller company.

For example, in the latest quarter, Karooooo achieved a Q2 record number of net subscriber additions (94 415 subscribers). The pressure point is that the word “record” needs to keep coming up for Cartrack to maintain the current growth rate.

Operating margin fluctuates

Karooooo’s global expansion has come at a cost. New offices needed to be established and staffed up before revenue could be achieved. The pandemic was a real challenge in this regard, as extended lockdowns in Asia meant that Karooooo was incurring expenses without being able to really focus on growth.

The lockdowns are in the rear-view mirror, but the underlying principle of timing differences between capacity and customer growth remains. This has historically been a major source of fluctuation in operating margin, which tends to be in the high-20s (e.g. 28% in the latest period). 

But now there’s a new reason why operating margin could be volatile, and you’ll find it further up the income statement.

Gross margin pressure – and it could get worse over time

The company’s gross margin fell from 72% to 70% in the latest quarter. This was enough to offset the benefit of solid cost control further down the income statement, leading to operating margin dipping from 29% to 28%.

But what is causing this?

The primary answer lies in the telematic devices that Cartrack must fit to its customer vehicles. The unprecedented investment in AI infrastructure has driven a spike in memory costs. This directly impacts the cost of these critical devices.

In a perfect world, Karooooo would be able to adjust its pricing and protect gross margins. With consumers under pressure and with competitors fighting over market share, there’s no guarantee that this will be possible.

This creates the risk of declines in gross margin if Karooooo cannot fully recover these increases through pricing interventions or other leverage in the cost of sales line.

The extent and timing of such declines is uncertain, but the nuance is that this trend could play out over years (rather than months) due to the accounting policies applied to the telematics devices.

To understand the severity of the pressure on these devices, we need to look in the commentary related to the cash flow statement.

Free cash flow has dropped sharply

Karooooo’s investment in telematics devices doesn’t come through as inventory. Instead, it sits on the Property, Plant and Equipment line.

The installed base of devices had a carrying value of R2.2 billion as at August 2026. This number would typically grow in line with the increase in subscribers.

The more interesting view is uninstalled and work-in-progress devices, which jumped to R457 million and R237 million, respectively. That’s an increase of 61% and 113%!

This percentage increase is multiple times higher than Karooooo’s guidance for subscriber growth, so there must be other factors at play here. Karooooo appears to be responding to supply shortages and the risk of further inflation in telematics devices. The company hasn’t clearly quantified the relative impact of each factor, but it seems as though a combination of higher inventory buffers and increased per-unit costs is at play.

This is the primary reason for the significant pressure on free cash flow, which dropped from R358 million to R100 million. Free cash flow fluctuations are nothing to Karooooo, but this one is particularly interesting because of the impact it could have on gross margin in years to come as these more expensive devices need to be recognised in cost of sales.

A quick note on DaaS

Karooooo has dabbled in services beyond Cartrack. The Logistics B2B delivery-as-a-service (DaaS) business is a perfect example, providing a flexible fleet of third-party delivery drivers to enterprise customers who want to switch on a quick commerce offering.

There are strong tailwinds here in terms of omnichannel retail trends, but it’s an expensive business to build as the driver network is developed. Although revenue increased by 36% in the latest period, operating profit margin declined from 9% to 6%.

It remains small in the group context though, with operating profit of just R11.2 million vs. R411 million at Cartrack in the latest quarter.

Looking ahead

At the halfway mark in the 2027 financial year, Karooooo’s major metrics are running in line with the full-year guidance. This guidance is wide in some cases (like revenue growth of 18% to 24%) and narrower in others (like gross profit margin of 70% to 72%).

The elephant in the room is free cash flow. The company doesn’t give specific guidance for this metric. The question that many are asking is whether the AI-related surge in memory and other costs can continue. It’s a question that nobody seems able to answer with any confidence.

Karooooo can’t control the AI impacts. All they can do is work to achieve guidance in subscriber growth and profitability metrics.

With the share price being range-bound in recent months and up 27% over 12 months, the market is weighing up the revenue growth and margins vs. the free cash flow pressure.

Disclosure: The Finance Ghost holds a position in Karooooo at the time of writing. BROKSTOCK, its employees, representatives or related parties may hold positions in the financial instruments discussed.  

(1)     Karooooo Q2’27 earnings filing

(2)     Moneyweb data, accessed on 21 October 2026

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