I will admit that paying 12x forward sales on the surface looks like a stretched multiple. But as you look through, you’ll see a company that has turned profitable and is likely to operate as a self-funding business going forward.
But I get ahead of myself. On balance, there’s a lot to be excited about Samsara, even though I openly discuss some noteworthy blemishes. Let’s get to it.
Back in September, I recommended a BUY on Samsara and noted in Hidden Value Hidden in Plain Sight by saying,
I believe that Samsara has strong prospects ahead and its stock is still attractively valued. However, I don’t believe that investors should be banking on a further multiple expansion.
And then concluded by saying,
Samsara continues to be an intriguing investment opportunity, offering the potential for substantial returns in the future.
The comments above came on the back of my recommendation to buy this stock when I wrote, Samsara: Inflection Quarter. As you can see below, the stock has been on a tear since my recommendation.
Yet, I’ll be the first to make this clear, that holding onto Samsara would not have been easy. Very few investors would have had the stamina to stick with my recommendation.
Nonetheless, even now, I continue to recommend this stock, but I’m quick to note that there’s a lot of nuance in this analysis.
Samsara’s Near-Term Prospects
Samsara is a company that helps other businesses, especially those with complex physical operations like construction, transportation, and more. They provide a smart platform that collects data from various sources like vehicles, equipment, and workers. This data is then stored and processed in a cloud, allowing Samsara to offer practical applications and insights to improve the efficiency, safety, and sustainability of their clients’ operations. Essentially, Samsara acts as a digital partner for companies, making their day-to-day processes smoother and more effective.
Samsara’s near-term prospects appear promising, driven by several key factors that position the company for continued success. Firstly, the company’s robust financial performance, highlighted by surpassing $1 billion in Annual Recurring Revenue in just eight years, showcases its ability to achieve rapid scale, growth, and profitability simultaneously.
Secondly, Samsara’s focus on addressing a substantial market that is still in the early stages of digitization positions it for continued growth. With physical operations representing more than 40% of global GDP, the company’s role as a pioneer in developing the Connected Operations Cloud provides a comprehensive solution for collecting Internet of Things data from various sources, including vehicles, equipment, sites, and workers. This integrated approach, aggregating diverse data into a common cloud, sets Samsara apart in delivering a single platform for all operational systems. As the company leverages its 6 trillion data points and 55 billion API calls over the last year, combined with a growing ecosystem of connected assets and third-party systems, it is poised to unlock further opportunities for delivering valuable applications and insights to its expanding customer base.
Next, I recognize that what I’m going to say next will put off the vast majority of my readers. But alas, here we go. The one notable aspect that I’m keeping an eye on here is its customer adoption growth. Allow me to explain.
Back in fiscal Q2 20204 (the previous quarter), Samsara’s customers spending more than $100K of ARR were up 53% y/y, see above. And in the space of 90 days, this figure has decelerated to 49%, see below.
And I fully recognize that this deceleration can easily be justified. Fairly easily. But the fact remains that whenever a stock appears richly priced, you demand a pristine story and pristine fundamentals too.
Nonetheless, this doesn’t detract from my bull case, but it is a notable aspect that I’ll keep an eye on going forward.
All that said, let’s press ahead.
Revenue Growth Rates Continue to Impress
In my previous analysis, I said,
Samsara can still be counted for growing at more than 30% CAGR for at least the foreseeable future. That’s great and backs up its narrative of a ”fast-growing futuristic tech” company, the exact sort of stock that investors are always willing to put a very high multiple upon.
The bad news is that even if we were to add 5% or even 6% growth on top of the guidance for H2 2024, it appears that Samsara is unlikely to match the revenue growth rates that it was putting out last year, at the high 40s% CAGR.
With another set of results as evidence, I can see that my assumptions were correct. Even if fiscal Q4 2024 comes in around 45% CAGR, the days when Samsara could be counted on for high 40s% CAGR have faded away.
And I understand investors would read my thought process and say, eh, what’s the problem? ”Growth is growth.” The problem again boils down to its valuation, which we discuss next.
IOT Stock Valuation – 12x Forward Sales
I won’t say that paying 12x forward sales is expensive for the right growth stock, with the right narrative. Obviously, the market has a habit of paying exorbitant multiples for the best stories, and sometimes the market gets it right.
And then we all talk about those outliers, like the Magnificent 7. But those are outliers that have survived. It doesn’t put any focus on the other businesses that looked set to be the next outliers, but in the end, failed to live up to their expectations.
That being said, it’s important to make it clear that Samsara’s stock, according to my calculations, appears cheaper than the 16x forward sales shown above. The reason is that I’m looking slightly further out, and I’ve accounted for this sparkling set of results, too.
Now, let me get to the reason why – despite all those considerations – I’m still bullish on Samsara. This can be succinctly shown below:
What you see above is that Samsara was previously guided to finish fiscal 2024 with -3% operating margins. Investors wouldn’t have been particularly interested in rewarding a stock that was obsessed with growth at any cost. And now?
Samsara guides to finish fiscal 2024 with -1% operating margins. But what’s crucial to see here is that there’s a high likelihood that going forward on a sustainable basis this business will be profitably operated.
The Bottom Line
In conclusion, despite the apparent concerns over Samsara’s valuation, particularly with a forward sales multiple of 12x, the company’s recent financial performance and the strategic shift towards profitability offer a compelling narrative.
While acknowledging the nuanced challenges and a deceleration in customer adoption growth, the underlying strength in Samsara’s core business, as demonstrated by its ability to surpass $1 billion in Annual Recurring Revenue and achieve rapid scale, remains a testament to its potential.
The shift from a previously projected -3% to a guided -1% operating margin by the end of fiscal 2024 indicates a notable pivot toward profitability. This trajectory, combined with the company’s innovative solutions in the Connected Operations Cloud and its extensive data infrastructure, positions Samsara as a promising player in the market.
Considering these factors, I maintain my bullish outlook on Samsara, recognizing that, despite valuation concerns, the company’s evolving profitability and strategic positioning are key indicators of its future success.