Samsara Stock: Successful Business Expansions To Unlock More Upside (NYSE:IOT)

Samsara (NYSE:IOT) is a company developing IoT (Internet of Things) systems that help extract and gather operational data into its cloud platform to derive insights and streamline operations.

IOT was founded in 2015, and initially, it started out as a company delivering connected fleet solutions, such as vehicle telematics and video-based safety offerings. Over time, it has been making expansions into adjacent areas, such as connected equipment and sites, effectively broadening its TAM through entering new verticals and use cases with new products. Nonetheless, how the product operates remains the same fundamentally, which I believe makes the business model relatively simple. For instance, in most cases, IOT’s clients attach IoT tools on their assets to start collecting data and generating insights in the cloud.

In my view, the competitive advantage of IOT lies in its core engine’s accumulated knowledge derived from gathering and processing operational data across different sectors and verticals over time. This will allow its offerings to better provide actionable insights for its clients to deliver better operational improvements or work safety. Going forward, IOT’s engine should grow to be even more powerful with the help of AI.

IOT has been performing relatively well since the IPO. It went public in 2021 at $23, and it is trading at $36, up 60% since then. Much of that strong performance appears to be driven by IOT’s consistent upward trend since the start of last year, as demonstrated by IOT’s solid 100% share price gain over the past year.

I initiate my coverage on IOT with a buy rating. My 1-year price target of $40 suggests that IOT presents over 12% upside. I expect IOT to continue benefiting from secular growth opportunities in industrial IoT across various verticals, given its strong offerings and executions so far. It is possible for IOT to see higher upside than 12%, considering my conservative assumptions, in my opinion, making risk reward attractive.

Financial Reviews

IOT’s fundamentals appear mixed, yet improving. Revenue growth has been normalizing from the triple-digit growth rate at the time of IPO to over 40% in the most recent FY, FY 2024. Though the decline in growth here is expected, I believe a 40% growth is impressive for a company at IOT’s scale. IOT delivered over $937 million of revenue in FY 2024, making it pretty much almost a billion-dollar business today.

The key improvements happened in profitability and cash flow generations. Net loss margin continues to narrow as well in FY 2024, though at -30%, there still seems to be a lot of work to do here to bring it to breakeven from GAAP standpoint. This was primarily caused by the high level of SBC (Stock-Based Compensation) that drove GAAP operating loss, which amounted to over $250 million. Excluding that as well as other non-cash and other one-time expenses, IOT actually already delivered a non-GAAP operating income breakeven.

As of FY 2024, IOT has also progressed well in terms of operating cash flow (OCF) burn. It is still a cash-burning operation today, but the fact that it has been able to cut OCF burn from almost -$200 million two years ago to just under -$12 million as of FY 2024, demonstrates IOT’s promising potential to be a cash-generating business soon. The subdued OCF burn has helped IOT’s liquidity position, which already continued declining since raising over $800 million at IPO. IOT ended FY 2024 with over $547 million of cash and short-term investments, with no debt.

Catalyst

I believe IOT’s solid growth performance is driven by confluence of secular digitalization trends in multiple verticals, such as transportation, construction, utility, and more. Given the relatively attractive TAM size and growth of these verticals, IOT should benefit greatly from powerful tailwinds into 2024 and beyond.

As projected by Grand View Research, industrial IoT was estimated to be a $394 billion market last year. Moreover, it is still expected to grow by 23% CAGR, making it over $484 billion market this year, a very attractive TAM size.

In my opinion, IOT is in a good position to capture a lot of value from this market, due to its sector-agnostic offerings that could penetrate almost all verticals. Therefore, while IOT has probably been more well-known as a leading vehicle telematics solution provider, its diversification efforts have been relatively successful, in my view. This has been demonstrated by the recent sales wins beyond just the transportation sector, its core market, in Q4, as commented by the management:

Second, our construction vertical contributed a quarterly record 20% of net new ACV in Q4, the second consecutive quarter that construction was our leading vertical. Additionally, 87% of Q4 net new ACV came from non-transportation verticals, an increase from 81% in Q4 last year.

Source: Q4 earnings call.

I also think that the direction to focus on larger clients taken by the management has been ideal. So far, IOT has done very well on large customer acquisition as of Q4 2024, which serves as an indicator for future revenue growth through potential product expansions. Generally, larger clients not only allow IOT to generate higher revenue from initial acquisition, but more importantly also often have broader needs that could be addressed through multiple products.

Longer term, expansion from within the existing install base is always important for any software companies to grow revenue efficiently. IOT has also done relatively well here. But with the demand environment continuing to strengthen, I believe it could be possible to see a net new ACV split of 40% – 60% between new and expansion customers in the next two years.

Moreover, I also believe the stronger revenue generation from install base expansion should help IOT achieve profitability faster, primarily through optimization of sales & marketing (S&M) and G&A expenses. In particular, it could probably be achieved through less intensive hiring of new sales headcount, which effectively should also benefit G&A expenses. As of FY 2024, S&M and G&A still represented 52% and 21% of revenues consecutively. These are relatively high figures, in my opinion, meaning there is so much room for upside.

Risk

I believe risk remains minimal. However, one thing that could often put downward pressure on share performance at this level would likely be sales execution issues. Though there has not been any indication of issues as of today, in general, it could be driven by any factors, such as slower demand for IoT solutions in certain verticals due to macro downturn specific to such verticals.

This type of risk should continue to decline as IOT continues to diversify its client base, in my opinion. Nonetheless, it is probably important for investors to monitor the connected fleets industry outlook, as IOT’s main business is still concentrated within this vertical today:

Two of our Applications, Video-Based Safety and Vehicle Telematics, each represented more than $400 million of ARR and grew more than 30% year-over-year, and one of our Applications, Connected Equipment, represented more than $100 million of ARR and grew more than 30% year-over-year as of February 3, 2024

Source: 10K.

Furthermore, the relatively high SBCs, which may be seen as a concern due to its dilutive effect, should also be a lesser issue longer term, especially as IOT continues to increase sales activity upmarket and to consciously take action to optimize dilution. As commented by the management in Q4, IOT already reduced equity dilution by 40% YoY.

Valuation / Pricing

My target price for IOT is driven by the following assumptions for the bull vs bear scenarios of the FY 2025 projection:

1. Bull scenario (70% probability) assumptions – I expect revenue to grow 27.6% YoY to $1.196 billion, in line with the company’s guidance. I assume forward P/S to remain at 20.4x, implying a share price appreciation to $42.

2. Bear scenario (30% probability) assumptions – IOT to deliver FY 2025 revenue of $1.180 billion, $6 million lower than the company’s low-end revenue guidance, suggesting a miss. I assign IOT a forward P/S of 17.2x, a contraction from today’s 20.4x that projects correction to $35, or sideways price action.

Consolidating all the information above into my model, I arrived at an FY 2025 weighted target price of $40 per share, projecting a 1-year upside of over 12%. I assign the stock a buy rating.

My assumption of 70-30 for bull and bear scenarios are based on the management’s comment about higher revenue visibility into FY 2025. As such, I would tend to believe that it is likely for IOT to achieve at least its midpoint revenue target. Nonetheless, I still lowered my bear case revenue estimate to be conservative.

Furthermore, my 20.4x P/S projection for the bull scenario also implies no multiple expansion, which is another conservative assumption – assuming IOT sees continuous improvement in profitability as I highlighted earlier, P/S multiple may generally go up to account for the market premium. For instance, we have seen this trend since 2022, where P/S has gone from merely 7.8x in mid-2022 all the way to 20x today, in line with the significant narrowing of net losses within the same period.

Conclusion

IOT is a company developing IoT systems with a successful vertical expansion track record so far. Started as a company well-known for its solutions in the connected fleets, it has made expansions into connected equipment and sites, serving major clients across different verticals. Business seems solid, and fundamentals continue to improve. Risk also appears minimal. My conservative price target model suggests a 12% 1-year upside from today’s price. I rate the stock a buy.