The movie Jurassic Park came out when I was in high school. I still vividly remember the first watch of the movie. The dinosaurs looked amazing, and the film was a fun action/comedy/horror mishmash.But the thing that struck this techno-geeks sensibilities the hardest was how high-tech the park itself was. Everything run from a small central control center, with a staff of just a handful of people?! Instant monitoring of everything in the park – the vehicles, the fences, the dinos, the security systems – from a single screen?! That seemed amazing and represented an interesting take on the future of systems management.Oh sure, the main villain of the movie turned out to be the guy who developed it all, but still!This movie came to mind when researching today’s stock, Samsara (IOT).The product Samsara sells reminds me a lot of the Jurassic Park automation systems. Let’s just hope Dennis Nedry isn’t secretly involved!Here’s a closer look at the company.
The Smart Home for Business
One way to think about Samsara is that it is developing the “smart home” for business.Consumers can link all kinds of smart devices up to their phones nowadays. Remote doorbells, electronic locks, garage door openers, thermostats, lights… almost all home systems can now be controlled and monitored, remotely, from a cell phone.Samsara’s Connected Operations Cloud pools data and creates business intelligence from sensors that come with (or are placed) on hard physical assets. Some examples would be dash cameras on delivery trucks, maintenance codes from ECUs on construction vehicles, or pressure sensors on oil wells. Samsara’s platform can read, collate, and present data from all these sensors to create a single dashboard for operations management to its clients.One key differentiation from competitors is Samsara’s focus on creating a platform that is applicable across many industries, instead of focusing its efforts on trucking, or construction, or energy, etc. The company targets verticals in a large number of industries, including transportation, wholesale/retail, construction, logistics, energy, government, manufacturing, and many more.The value proposition is attractive. The platform surfaces a lot of problems and improvement areas that would otherwise not be obvious. By acting on these insights, clients can make operational changes and get a large return on investment from the platform. Samsara has shared examples of clients reducing safety incidents, lowering emissions, identifying tax savings opportunities, and more.
Revenue Model and Growth Opportunity
Samsara has been growing quite rapidly, with a 3 year annualized revenue growth rate of 76%. Even recently, the firm has continued its torrid pace, reporting 40% revenue growth year-over-year in the most recent quarter.The company collects revenue on a subscription basis, pricing each subscription on a “per asset, per application” rate. This combines features of the “toll booth” and “subscription” recurring revenue models. With 98% of sales coming from subscriptions, Samsara easily passes the recurring revenue test.This setup allows it to grow organically with clients. For example, as a transportation firm grows, it will add more vehicles (“assets”), expanding its business under Samsara’s operations cloud.The addressable market looks vast and untapped here. Samsara is targeting general use physical asset management, which applies to a lot of very large industries. At present, 5 of the top 10 waste management companies, 4 of top 10 grocery chains, 6 of top 10 construction firms, 5 of top 10 chemical carriers, and 3 of the top 10 retailers use Samsara in at least a portion of their business. Pretty impressive, while still leaving a lot of room for growth both with existing and new customers.The firm is also heavily U.S.-based at present, with only 11% of sales coming internationally. That leaves a lot of future growth potential overseas.All told, the company estimates its 2024 addressable market at a spicy $97 billion, growing at over 20% a year. For a firm that’s only tracking for about $850 million in annual revenue, that is simply immense growth potential. Samsara should be able to grow at 20% rates for the foreseeable future.Is There A Moat?Big market opportunities like this have not gone unnoticed. Samsara competes against a myriad of other firms, many of them subsidiaries of larger companies.The bulk of the competition are focusing their efforts on particular use cases. For example, Avilgilon (a subsidiary of Motorola Solutions (MSI)), tailors its platform towards managing video surveillance (i.e. security cameras and similar). Cartrack (a part of Karooooo (KARO)) offers platforms for managing vehicle fleets through dash cameras and vehicle system sensors. There are a number of others focused on vehicle fleet and industrial equipment monitoring.While Samsara’s more “general use” platform is attractive from an overall growth potential perspective, it is conceivable that more focused offerings could ultimately provide greater utility to customers.I do feel there are some SWITCHING COSTS here. As an operational management platform, clients will come to rely on Samsara for day-to-day operations, making switching to a competitor expensive and disruptive, at least for a while. For larger firms that use it for multiple parts of their business, it will be even more difficult to switch. That’s why Samsara is focused on customers with over $100,000 in annual recurring revenue – 90% of these firms subscribe to more than one application.At large, I see Samsara’s moat as being very similar to the moats for digital operations management platforms like Datadog (DDOG) or Dynatrace (DT). These are “shallow” moat firms with some switching costs. They are not as onerous for a client to switch as, say, a CRM or project management software suite, as they deal with real-time, short-lived data and not long-term company information assets.
Management and Financials
Samsara is run by co-founders Sanjit Biswas (CEO) and John Bicket (CTO). They have a long history together, previously founding and building up wi-fi network business Meraki before selling it to Cisco in 2012. Along with the two founders, three other senior leadership figures remain from Meraki, and the rest of the management team have backgrounds from highly successful firms like ServiceNow, Workday, and VMWare.Through ownership of “super-voting” class B shares, Biswas and Bicket alone own 60% of the voting power in Samsara – an easy majority. Famed tech investor Marc Andreessen holds another 20% voting stake. There’s little doubt that leadership has a major stake in the long-term success of the company, something we like to see.Financially, Samsara still has the markings of an early-stage growth firm. It has been free cash flow negative up until very recently, but also carries no debt and has a clean goodwill/intangibles balance. The firm has projected 25% EBITDA margins at maturity, which roughly convert to mature free cash margins. If and when the firm can meet those targets, we’re looking at a 40%+ ROIC operation here. Samsara is well-run.
We’ve painted a pretty clean investment case for Samsara up to this point, but here’s where things get a little muddier.My first concern is the competitive outlook. We noted the multitude of competitors in the space, and to be honest, I think a tighter focus on use cases might present a more attractive proposition to many clients. Samsara touts being general use as a competitive edge, but the fact is that 90% of its revenue come from just a few use cases like tracking trucking fleets. It has a long way to go to break into other areas and fulfill its promise. If it can’t, the addressable market is much smaller than we think.There’s also the fact that the firm is still just barely cash flow positive. Its ultimate level of profitability is very unclear. We can use a high discount rate when calculating a fair value but this still adds an extra dose of risk.Finally, Samsara has been targeted by short seller “Spruce Point Capital” around allegations that it has not been very successful in winning competitive deals and that it may use improper accounting practices.My feeling on attention-seeking short sellers is complex, but generally, there is at least a modicum of truth in these reports. I don’t think it is any big stretch to say Samsara relies on just a few use cases – this is clear from their own material. Meaningful accounting allegations, though, I have a harder time swallowing considering the personal stakes that management has in the business.
Samsara is an interesting growth company with big market potential, recurring revenues, founder leadership, and a shallow moat through switching costs. On the other hand, the market is very competitive, profitability is early stage, and there are signs that the firm may not be able to reach its full investment potential. So does it make the cut?Running a conservative valuation estimate, I think the stock is quite a bit overvalued. It looks worth about $16.50 but trades at $33. At exactly 100% over my fair value estimate, plus the concerns listed earlier, I don’t think following Samsara is going to be worth it. We will pass at this point in time, although this is one we may come back to at a later date as it matures.More By This Author:2023 Year In ReviewThe 5 Durable Economic MoatsLong-Term, Organic Revenue Growth Is A Key To Investment Success