Musings on Samsara (IOT) Valuation and Competition / Mid-Quarter Update
Disclosure: This is not financial advice. Conduct extensive research and consult a financial advisor before making any investment decision. All investments, including those referenced in this article, may result in financial loss. I hold a beneficial ownership position in all companies outlined in this article (unless otherwise stated), therefore I am inherently biased in favor of these companies. One should view this article, and all companies discussed herein, through that lens.
Musings on Samsara (IOT):
I think the company is in a really interesting, potentially precarious spot here. They’ve got the 2nd highest P/S multiple in software right now at 25x TTM, behind PLTR at ~39x. Worth noting that IOT is growing faster than the other big names, at 36% YoY in Q2. PLTR grew at 26% YoY in Q2, which is also quite impressive but not at the same pace as IOT. Not even going to comment on PLTR valuation… some I know are shorting it because the multiple is pretty elevated here. Others I see mention the sheer amount of disruption the company is capable of, how effective the product is, etc. I don’t really have a view either way besides that the price seems a little frothy and could honestly benefit from a reasonable, maybe even modest pullback. Mostly I’m just glad that IOT’s multiple is a lot less egregious, and a healthy amount of growth is still priced in with the forward sales multiple at 20x.
IOT’s common (publicly trading) shares have 85% institutional ownership, compared to PLTR at 45%. Obviously, PLTR has a pretty large retail shareholder base, nothing on PLTR holders, just an observation.
Two pretty different product sets… at first glance they appear sorta similar, but IOT’s IoT (haha) is quite necessary to providing insights and efficiency metrics for physical operations companies, which represent 40% of global GDP. Larger players like PLTR or NOW can’t do the same things, because they fundamentally lack the physical data gathering capabilities. I feel like generally, PLTR’s products are more tailored to C-Suite or office level work, whereas IOT generates value out of optimizing physical aspects like warehousing, transportation, equipment operations (both heavy and handheld), and more. Not to mention, IOT has been investing in and working on products for frontline workers and human capital management apps, at least for the physical operations market. They’ve got payroll and invoice/billing integrations, integrations with tax service providers, and a lot of integrations with other SaaS offerings like Kronos’s human capital management (HCM) offerings, plus their own HCM offerings with the Samsara Driver App, and Connected Training and Connected Workflows apps.
I really don’t think it would be hard for IOT to disrupt a lot of these other providers, at least in the physical ops space. They’ve already got most of the data, the insights, and the capability to handle these tasks (payroll, billing, HCM) with partners. If they develop their own well tailored offerings here, their existing customers could further reduce their vendor count and switch over to adopting IOT for even more solutions. Even with increasing RnD spend, their FCF generation and operating leverage is high enough to maintain a competitive advantage on this front while growing earnings like crazy.
Speaking of… IOT will grow earnings and margins alike by a very outsized amount over the coming years, potentially decades, that’s basically guaranteed looking at the nature of their business model, and the extensive research I have conducted into it. Really the only downside is valuation, because a lot of others have come to the same conclusion - not many other retail traders like me, mostly hedge funds and institutions. During Q2, hedge fund net buys accounted for 10% of the public share value, bringing up the institutional ownership, whereas 80% of the retail sentiment I see on Twitter is bearish on IOT, save for the swing traders that like the stock for its, well, large swings.
I first bought the stock around a year ago, in late October 2023, at 15x sales. I’ve transitioned between brokers since, so my original cost basis is forever lost except in my ThinkorSwim paper IRA account, where I’m up 80% on shares, but that obviously doesn’t really count.
The valuation here admittedly terrifies me. 20x forward sales is kinda high, even for software. Even though I can honestly say, I think they can reasonably 20x revenues within 15 years or so, and they’ll have pretty high terminal margins, I think north of 30% operating, so a higher P/S can be justified…
Still, the ever looming potential for a broader market decline is the biggest risk for this stock. Despite the rapid pace of future earnings growth we expect, if multiples get compressed across the board, IOT’s will likely be among the fastest to fall. This stock could fall 50% or more in a recession before the earnings growth gives it a real price floor, IMO, despite the fact that the core business model, both revenues and profitability are very recession resistant and robust.
If any of my readers hold the stock, I would very much consider trimming the position some or at least watching things carefully - there may likely be much better prices at which to buy this stock in the future. Long term I think it’ll do just fine, so from here the play depends on risk tolerance and holding period expectations. Alternatively, you could cut your IOT in half and put the rest in AIOT, PowerFleet.
I talked smack about them in my first IOT article back in May, but they completed a merger recently that should bring the company up to scratch. Not quite as polished or expansive as IOT’s offerings, but impressive nonetheless and I’ve seen theses that argue the current share price doesn’t reflect these increased capabilities. Also, the valuation is a lot more forgiving at just 4x TTM sales. Important to note that IOT is much bigger revenue wise, has 80% gross margins to AIOT’s ~50%, is already half penetrated with the largest customers in most verticals, and can spend much more on RnD and marketing - hence the premium valuation. Still, AIOT may be an equally attractive play given the large valuation discrepancy. You could probably do just fine owning both equal weight, as the TAM has low penetration and there’s room for multiple winners in this sector. However, I personally do favor IOT long term as these markets tend to cluster around best-in-class, unified systems like IOT’s over the span of decades - but this is not advice, and other investors could probably benefit at least in the short to medium term by diversifying between these two.
IOT also has very low beta. Just 4% of shares are owned by ETFs, and management still owns the vast majority of the company’s total share volume, over 50%. IOT is thus not eligible for S&P500 index inclusion, or a lot of other indexes, as the public float is something like 40%, you need 50% to make it into the S&P… insiders will legitimately have to continue selling at elevated rates to bring the public float, class A shares, up to par with the class B shares. Kinda funny in a way - heavy insider selling that could be good news for the company down the road. But until we see at least some support from passive index investors who will autobuy the stock every month in a 401(k), earnings and sentiment will drive price more than anything else. Both are good right now, and earnings will continue to be good, but I can’t say the same for sentiment, which is the vast majority of the current price here at 20x forward sales.
All this to say, if you own any IOT, best to watch it closely, trim, or cut the position. When markets get frothy, it may be a good idea to take some chips off the table, or buy a comp like AIOT at a much cheaper valuation. IOT reports Q3 earnings in 45 days, I’m excited and I will be posting an update here. And as always, please be careful with your money everyone. Stay safe out there and happy trading!