I'd also note that the traffic business is budget-sensitive. A recent increase in federal spending on infrastructure should help, but government spending on infrastructure has been erratic. The agriculture opportunity is much more speculative. Many companies, including several start-ups, are looking to bring similar analytical platforms to the market, and farmers can be surprisingly conservative (if not stubborn) about adopting new technologies. I think Iteris might be relatively advantaged in that it's not looking (at this point) to sell into the rank-and-file farmer market, but I don't think there's any question a company like Monsanto has enormous advantages in terms of scale, recognition, and resources that can be invested into system development. To that end, I also have to wonder whether the company's relationship with Bayer will survive the Bayer-Monsanto merger (if that goes through). I think it's worth noting that Iteris has a relatively long operating history with its traffic-related businesses and the growth performance there has been pretty mixed. Revenue growth has been relatively solid since the sale of the vehicle sensor business back in 2011, but margins have been weak. I believe that Iteris can likely maintain mid single-digit growth in the traffic business. Self-driving and/or connected cars, not to mention a greater focus on data-driven design and management, could drive better growth but I do believe that there will be budgetary headwinds. While I don't expect Iteris's addressable precision ag market to grow as quickly as management has suggested, I do believe this business can grow at a long-term compound rate of over 30%. Even at that growth rate, Iteris would still only have a single-digit share of its addressable market. 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.
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