2023-12-27 15:10:27 ET
Summary
- Samsara is a fast-growing software company that has outperformed the S&P 500, software, and cloud computing markets.
- The company's Connected Operations Cloud is attractive to businesses with physical assets, offering improved operations and performance.
- Customers are drawn to its single platform, intuitive technology, and strategic customer partnership, delivering clear and fast ROI.
As one of the fastest-growing software companies in the market, Samsara ( IOT ) started capturing investors' attention this year. The market has bid the stock up 173.6% as of the closing price on December 22, 2023, substantially beating returns from the S&P 500, software, and cloud computing markets.
Samsara is a pioneer and leading player in developing the concept of Connected Operations Cloud. On its cloud platform, businesses that depend on physical operations can store and analyze Internet of Things ("IoT") data to create business insights that management uses to improve operations. The opportunity in this business is potentially massive, and the company has produced results in its Fiscal Year ("FY") 2024 pleasing to aggressive growth investors' eyes. This article will discuss the company's products, why Samsara's cloud attracts customers, its business fundamentals, future growth prospects, valuation, risks, and whether the company has moved too far and fast to invest in it today.
The products the company offers
Samsara's products consist of two parts. The first part is a Data Platform, which gathers, collects, and combines data from IoT devices and third-party resources. The Data Platform also contains Artificial Intelligence ("AI"), analytics, workflow, privacy, security, provisions for alerts, and the ability to connect to third-party apps.
The second part consists of the following applications:
- Video-Based Safety - Companies use this application to build a state-of-the-art fleet safety program. It consists of dash cams, an AI-powered in-cab alert system for the driver, a Virtual coaching system, and a mobile phone management system. This Safety app includes driver safety scorecards and risk reports and can compare a customer's fleet to the rest of the industry.
- Vehicle Telematics - Samsara bills this app as " Technology that goes beyond GPS tracking. " This app can give a company the ability to track vehicles in real-time using GPS, monitor engine diagnostics and fault codes, optimize a driver's route, perform real-time dispatching, analyze a driver's performance (i.e., whether a driver speeds or performs dangerous maneuvers), time a vehicle spends on site, and the ability to integrate with different third-party routing and dispatching software.
- Apps and Driver Workflows - The Samsara Driver App gives drivers the ability to take delivery photos, write notes, capture electronic signatures, and more using a smartphone or tablet. Additional functions of the app include helping drivers satisfy regulations set by the Federal Motor Carrier Safety Administration, vehicle inspection, and maintenance reporting.
- Equipment Monitoring - This app uses GPS to track powered equipment like scissor lifts, light towers, generators, unpowered assets such as roll-offs, containers, and water tanks, and heavy equipment like forklifts, excavators, and bulldozers to prevent loss or theft. The company describes the app this way: " Prevent loss and theft, lengthy yard hunts, and unnecessary equipment transfers to and from different job sites with real-time GPS and geofence alerts ." In addition, the app can monitor the performance of powered equipment using real-time diagnostics and monitoring of error codes.
- Site visibility - This app uses AI-powered video surveillance to monitor facilities safely for workplace safety and security purposes.
The Connected Operations Cloud is attractive to businesses with physical assets
Although many cloud-native and internet businesses are already fairly advanced in integrating digital technologies, companies that own and operate a large footprint of physical assets in industries like construction, agriculture, hospitality, real estate, utilities, oil, mining, chemical, and pharmaceutical have lagged in digital transformation efforts. A few other heavy asset industries, such as manufacturing, transportation, and warehousing, are further down the path to digitizing but could improve further. Samsara's Connected Operations Cloud stands out as one of the more compelling solutions, allowing businesses with sizeable physical assets to improve operations, optimize workflows, and engage in data-driven decision-making, paving the way for greater competitiveness within their industry and catching up to more digitally transformed companies.
Co-founder and Chief Executive Officer Sanjit Biswas talked about why companies rapidly gravitate to Samsara's solutions on the company's third quarter FY 2024 earnings call :
Our customers partner with us because we drive impact for them. As part of our ongoing customer feedback loop, we meet with the frontline and back-office workers to understand where they are getting the most value. Here is what they say sets us apart. First, our single platform for all of their operational systems; second, our simple, intuitive and easy-to-use technology that just works out of the box; and third, our strategic customer partnership. All of this together is what powers our customers' outcomes and helps deliver clear and fast ROI [Return on Investment] for their organizations.
Source: Samsara Third Quarter FY 2024 Earnings Call
The company gave two real-life examples of how it benefits customers on its earnings call. The first example involves one of the largest air carriers in the world using the platform to track its ground equipment across major U.S. hubs. The second example highlights a Video-Based Safety deal with one of the largest U.S. specialty contracting companies that, according to Samsara, is focused on " construction services, maintenance, replacement, fabrication, and engineering services. " The image below shows how both companies benefitted.
The CEO of Samsara also said the following in the latest earnings call: " Physical operations represent more than 40% of global GDP [Gross Domestic Product]. " Since global GDP was roughly $100 trillion in 2022, Samsara is in the initial stages of addressing a $40 trillion market. Since it only produced $847.7 million in 12-month trailing revenue by the end of the September quarter, the company has barely penetrated its addressable market.
How the company differentiates from competitors
Samsara competes in a highly fragmented industry with most of its competition only providing solutions for specific industries or customers. In the company's FY 2023 10-K , the company identified its competitors within each application.
Application | Competition |
Video-Based Safety | Lytx and SmartDrive |
Vehicle Telematics | Verizon ( VZ ), Geotab, and Omnitracs |
Equipment Monitoring | Orbcomm, ZTR, and homegrown internal solutions |
Site Visibility | Avigilon, a Motorola Solutions ( MSI ) company |
Source: Samsara FY 2023 10-K
Management believes its differentiating factor is that it leads in the quantity and diversity of IoT data types on its platform, allowing it to generate high-quality analytic insights for its customers. Samsara's FY 2023 10-K states:
In fiscal year 2023, our Data Platform collected approximately six trillion data points. This immense amount of data enables us to continuously enhance our AI models. We can correlate this data with different datasets, such as customer driving behavior and traffic patterns, and use AI to identify hotspots for unsafe driving behavior, such as harsh braking, which can even help our local government customers make informed decisions on signage, community safety education, and more. As we aggregate and analyze more data, the benefits of our Connected Operations Cloud increase.
Source: Samsara's FY 2023 10-K
Samsara's platform is building a Network Effect moat. The more customers that join its platform, the more data customers generate that makes its AI more intelligent, making the platform increasingly more valuable to existing and prospective customers. Additionally, you could argue that the company is building a Switching Cost moat due to data lock-in, where customers accumulating considerable data on Samsara's platform may be reluctant to pay the costs of migrating that data to a competing platform.
Business fundamentals
One thing very enticing for investors is that the Connected Operations Cloud is a subscription-based business. Wall Street and individual investors value subscription businesses more than one-time sales business models, as subscription businesses offer more consistent and predictable revenue streams. The company stated in its FY 2023 10-K:
We offer access to our Connected Operations Cloud on a subscription basis and price each subscription on a per asset, per application basis. In each of the last three fiscal years, we generated approximately 98% of our revenue from subscriptions to our Connected Operations Cloud. Our business model focuses on maximizing the lifetime value of our customer relationships and we continue to make significant investments in order to grow our customer base.
Source: Samsara FY 2023 10-K
The company also produces solid revenue growth and has an Annual Recurring Revenue ("ARR") growth rate that nearly matches its revenue growth rate, indicating that its high revenue growth rate stands a good chance of continuing in the near term. Samsara increased its third quarter FY 2024 revenue by 40% over the previous year's comparable quarter to $237.5 million. It raised its ARR over the same period by 39% to $1.003 billion. More importantly, customers with ARR over $100,000 grew 49% year-over-year to 1,663 customers. The company's Chief Financial Officer, Dominic Phillips, also stated, " This was our third consecutive quarter of accelerating year-over-year net new ARR growth at a larger scale. " Samsara's continuous acceleration in net new ARR growth indicates that its platform appeals to a growing customer base.
Samsara is one of only seven publicly traded software companies that produced over $1 billion in ARR, more than 30% growth, and was free cash flow ("FCF") positive at the end of the calendar year September 2023 quarter.
Although Samsara is not currently Generally Accepted Accounting Principles ("GAAP") profitable, some analysts and investors believe Samsara has a good chance of achieving profitability in the future, supported by its revenue growth trajectory and cost-saving efforts in areas like sales and marketing, general and administrative expenses, and some further efficiency gains in research and development. Ever since early 2022, Sales and Marketing (S&M), Research and Development (R&D), and General and Administrative (G&A) Expense percentages of quarterly revenue have continued to drop. For instance, S&M and R&D Expenses as a percentage of quarterly revenue were above 90% at the beginning of 2022 but now stand at 49.16% and 25.60%, respectively, at the end of the third quarter of the 2023 calendar year. G&A was above 60% at the start of 2022 but now stands at 20.36% at the end of the third quarter of the 2023 calendar year. The chart below shows that operating expenses in absolute terms dropped in the third quarter while operating margins continued to improve on a GAAP basis.
As a somewhat early-stage company, Samsara emphasizes non-GAAP metrics, which exclude one-time costs that newer companies sometimes rack up, providing a clearer picture of the profitability trajectory. The company reported a non-GAAP operating margin that achieved profitability for the first time at a positive 5% compared to a negative 10% in the third quarter of last year. Adjusted FCF margin was 4% or $9 million in the third quarter compared to negative 9% or a loss of $15 million in the previous year's third quarter. The CFO attributed the increase on the earnings call to " improved operating leverage and continued working capital improvements. "
The company raised its revenue and profitability guidance for FY 2024, as shown in the chart below.
Lastly, the company has a healthy balance sheet. It ended the September quarter with $659.76 million in cash and short-term investments with no long-term debt.
Risks
In September 2023, Spruce Capital wrote a short report about Samsara with a thesis that the company is a story stock that allegedly overhypes its technology to retail investors. Spruce Capital states in the report:
Spruce Point believes that IoT is an old technology that has suffered from adoption headwinds and poor profitability. Recall that even C3.ai ( AI ) was C3.IoT before its business model pivot. We find a common theme among technology stock promoters: they typically rely heavily on targeting retail investors to sell their story of large profits and riches from buying the stock. Not surprisingly, like C3.ai, Samsara has been a story relentlessly pitched to retail investors.
Source: Spruce Point
The report also accuses Samsara of overstating gross and EBITDA margins, competitors commoditizing a small handful of Samsara's niche applications, historically being one of the most unprofitable SaaS companies, and other accusations in an 88-page report.
Nanalyze, a research subscription service bullish on Samsara, analyzed Samsara's short report and concluded that several issues that Spruce Capital brought up should be researched further, such as Samsara's inability to diversify outside of Telematics. My description of its products in the earlier part of this article shows that most of the company's applications deal with vehicle tracking and telematics. Other areas Nanalyze brought up were concerns about the company's retention rate and how much of its sales are hardware versus software. If you are considering buying Samsara, you should read Nanalyze's opinion of Spruce Capital's short report.
Lastly, experts currently expect the economy in the U.S . and Europe to avoid a recession. However, if the economy worsens, that event could reduce top-line growth and slow Samsara's progress toward profitability, which may cause investors to sell off this highly valued stock in the short term.
Is it worth buying at such a high valuation?
By all traditional valuation metrics, the market currently overvalues Samsara. Seeking Alpha's quant gives the company a D-. Let's look at a Reverse Discounted Cash Flow ("DCF") to see what growth the company's current stock price implies.
Samsara Reverse DCF
The third quarter of FY 2024 reported Free Cash Flow TTM (Trailing 12 months in millions) | $11 |
Terminal growth rate | 3% |
Discount Rate | 10% |
Years 1 - 10 growth rate | 74% |
Current Stock Price (December 26, 2023, closing price) | $34.82 |
Terminal FCF value | $2.830 billion |
My calculations show that the current stock price implies FCF growing at a rate of 74% over the next ten years, an extremely aggressive growth rate. Although the company is at such an early stage of growth that makes this reverse DCF unreliable, I believe the market currently overvalues Samsara when considering the company's risks.
Only the most aggressive of investors should consider buying the stock at current prices. If you don't already own shares, avoid buying. However, the stock has a potential massive long-term upside that justifies existing shareholders continuing to hold the stock. I have a Hold rating on Samsara.
For further details see:
Samsara's Market Expansion: A Reason For Investors To Hold On