2023-06-22 05:40:46 ET
Summary
- Samsara's connected operations cloud brings improved safety, efficiency and returns on investment to its customers.
- The company's key competitive advantage is its data advantage, where it collects more than six trillion data points each year.
- The growth playbook is similar to other software players, growing with existing and new customers, expanding internationally and launching new products.
- As a technology focused IoT player, Samsara is highly scalable, secure and uses AI models to improve outcomes.
- My 1-year and 3-year price targets are $24.90 and $36.50, representing 18% downside and 31% upside from current levels respectively.
This article was first posted in Outperforming the Market on June 13, 2023.
Samsara ( IOT ) has rallied more than 200% since its 2022 lows and I will dive deeper into the company to learn more about what the business is about, who are the companies customers, how will the company grow in the future and what are the key competitive advantages of the company.
Samsara stock performance (Google Finance)
Brief introduction
Samsara is in the business of digitally transforming and improving physical operations of its customers by connecting the data it collects from the business through Internet of Things ("IoT") devices and other connected assets.
As a result, through the large amount of data collected from the daily physical operations of its customers on its platform, Samsara is able to then analyze and derive insights to help its customers drive more efficient, safe operations at a lower cost.
Samsara's products and solutions.
Samsara's key solution is its Connected Operations Cloud. On top of that, it offers a portfolio of IoT devices that allows its customers to be able to collect data from the offline environment to the cloud.
Samsara Connected Operations Cloud (Samsara )
Samsara's Connected Operations Cloud solution has both a data platform and applications. The data platform is meant to take in, aggregate and improve the data gathered from both the IoT devices mentioned above and other connected assets. There are AI, analytics, alerts and data security and privacy capabilities that can be used with the data platform.
In addition, Samsara offers applications for vehicle thematics, safety, equipment monitoring and site visibility, amongst others to add to their offering.
How Samsara's Connected Operations Cloud is being used
The key application and use case for Samsara today is mainly in the connected fleet space. Samsara is able to value add by digitizing the physical operations of commercial vehicle fleets to improve on the process of delivering and transporting goods and people. Some of the industries requiring improvements to their connected fleet include the transportation sector, retail sector, construction sector, and logistics sector, amongst others.
At the end of the day, these are industries that are looking to either lower costs while improve the efficiency of their services and processes. Samsara's business focusing on connected fleet has expanded rapidly over the past few years and management continues to see a large opportunity in this space.
One way in which connected fleets utilize Samsara's applications include safety that is enabled by video. Connected fleets are looking to improve safety using videos that are enabled by AI and helps to detect and warn drivers of higher risk activities and behaviors. Another way in which Samsara's applications can value add is to improve the productivity of the drivers as workflows of individual drivers are managed more seamlessly, ensuring that the network of drivers are both productive and gets sufficient rest time. Lastly, Samara's solutions offers connected fleets with better fuel management, higher utilization of electric charging, improving timing of maintenance as well as better routing and timetable management to ensure optimized operations.
Samsara is looking to diversify away from just being a connected fleets player and thinks that its industry agnostic approach will enable it to value add outside of connected fleets to more areas across physical operations. This include monitoring of equipment, anything from trailers to generators, and visibility for sites, which includes providing remote visibility to customer sites.
Samsara highlighted that it was the feedback from customers that led the company to invest and expand into these new applications outside of connected fleets to provide more solutions broadly across its customer's operations.
Producing results for customers
The results of using Samsara's solutions can be seen below. The company's customers have seen improvements in safety, high returns on investment and a short payback period as a result of the use of AI.
Samsara's results from its use of AI (Samsara IR)
Competitive advantages
First, Samsara's key advantage as an IoT player is its data advantage. The company collects about six trillion data points in its data platform each year. The large number and variety of data points collected differentiates Samsara's AI models as this brings enhancement to the AI model's ability to analyze and predict.
Second, Samsara's platform is able to manage multiple applications for a wide variety of industries. At the end of the day, other applications like payroll, human capital management and enterprise resource planning can also be integrated to the platform.
Lastly, Samsara's data platform was specifically built to improve physical operations by using the trillions of data points collected to generate insights. Its AI models have been trained to use the data collected every day to offer strong value added to the daily physical operations of its customers.
Strategy for growth
Samsara is looking to continue to grow through bringing in new customers and expanding within its current customer base. As a result of increasing digitalization of physical operations, Samsara should see increased interest from new customers for its offerings. At the same time, more than 90% of its customers with more than $100k ARR subscribed to multiple Samsara's applications. Also as of its latest FY1Q24 quarter, customer expansions were proving to be driving growth for the company. As such, there is also significant opportunity for further expansion within its existing customer base.
Samsara customer expansions driving growth (Samsara IR)
Another growth strategy is to expand internationally outside of the United States. As of FY2023, revenues from outside of the United States made up only 11% of total revenue and thus, I do think there's scope for this to expand meaningfully.
On top of that, Samsara continues to innovate and release new products into the market, which will bring more applications for its customers. Also, the company is also expanding on its partnerships and integrations which will further improve its ecosystem to ensure that Samsara's platform is able to operate across ecosystems and partners.
Technology as an advantage
Samsara is a technology focused IoT player and this has resulted in several advantages that I will highlight here.
Firstly, Samsara has a platform that is scalable. Its Connected Operations Cloud is built to scale and incorporate the newest technology. As technology changes very quickly, Samsara is able to quickly integrate new features and bring enhancements that will ensure that it has the ability to keep up with the times. As evident from the six trillion data points collected and analyzed each year, the data platform is built to scale.
Another advantage of Samsara is its use of AI. With six trillion data points being fed into the system each year, Samsara is able to train and build best-in-class AI models that in turn, generate better insights for customers to improve their operations.
In addition, Samsara highlights their state-of-art IoT device design that are built to enable easy installation, affordability, reliability and connectivity. While Samsara's Connected Operations Cloud is open to all IoT devices and assets, Samsara's own IoT devices are built to last and lower costs.
Lastly, Samsara's Connected Operations Cloud was built with privacy and security in mind. This is important because even if the technology were to be superior, Samsara needs to show that the data it collects is secure and private for it to be able to continue to grow and scale up.
Financials and operating efficiency
As can be seen below, Samsara has seen gross margins maintained at 73% while operating margins and adjusted free cash flow margins have improved by 9 percentage points and 35 percentage points respectively.
Operating efficiency of Samsara (Samsara)
In terms of guidance, Samsara expects to grow revenue between 33% to 34% in FY2024, while operating margins are expected to be negative 5% and Non-GAAP EPS between negative $0.02 to $0.
Valuation
IOT stock's valuation is too rich now, in my view, for any decent future gains.
Samsara's P/E for FY25 and FY26 are at 556x and 262x respectively, while its EV/Sales multiple is trading at 12x and 10x for FY25 and FY26 respectively.
Other software peers that are growing at around Samsara's growth rate of 30% are trading at around 8x to 9x 1-year forward EV/Sales.
In addition, Samsara's trough valuation was 8.5x EV/Sales in November 2022, and its current 21x EV/Sales just shows how valuation has reached early 2022 levels.
Based on its current share price of about $27.30 per share, this implies that it is trading at 68x 2027 P/E, which is a very expensive valuation. I shared with members of Outperforming the Market what my intrinsic value and entry price for Samsara is, which can be found here .
My 1-year price target is $24.90, based on 12x EV/Sales assumption for FY25, representing 9% downside from current levels.
Conclusion
I think that Samsara belongs in the bucket where the AI hype has brought its valuation to levels that are too rich and that has impacted its future implied returns.
That said, I think that Samsara has a strong value proposition in helping its customers optimize and improve their physical operations. Samsara will have a data advantage as it collects six trillion data points each year and this adds to the amount of data its AI model is able to train on.
In addition, the company is improving on its operating efficiency as margins are expected to improve with scale.
Lastly, I think that the growth strategy involving existing and new customers, additional product launches, geographical and partnership expansion will bring Samsara long-term growth. However, at the current valuations, all that growth has been priced to perfection.
My 1-year price target is $24.90, based on 12x EV/Sales assumption for FY25, representing 9% downside from current levels.
For further details see:
Samsara: Data Advantage Hard To Justify Sky-High Valuation