Industrial automation company Samsara (NYSE: IOT) went public in mid-December. Here at Value the Markets, we covered the Samsara IPO back then. And now that it’s been trading for over a month, we look at whether investing in Samsara is a wise decision.
To date, IOT stock has slipped 7% since its IPO debut. Nevertheless, its arrival was welcomed, and the company offers enough of a unique edge to keep investors interested. Read on for an in-depth overview.
What is Samsara?
Samsara is an American internet of things (IoT) company and a market leader in the space. It develops internet-connected sensor systems for the modern age and sees rising demand for its products.
Samsara has appeared on the Forbes Cloud 100 list for three years running. It was founded by John Bicket and Sanjit Biswas in 2015 and is headquartered in San Francisco, California.
The IoT sensation makes money selling subscriptions to its Connected Operations Cloud service. It prices its subscriptions on a per asset, per-application basis. These subs are sold via a 694-strong sales team employing direct selling techniques. It pared back the team last year as COVID restrictions took their toll but plans to expand again as it focuses on enhancing its marketing efforts.
As an IoT pioneer, Samsara targets established companies in a range of industries that power the global economy. This includes transportation, wholesale and retail trade, construction, field services, logistics, utilities and energy, government, healthcare and education, manufacturing, food and beverage, among others.
It strives to help these businesses streamline their operations while improving safety, efficiency and sustainability by connecting to the IoT.
Combining IoT connectivity, artificial intelligence (AI), cloud computing and video imagery, Samsara is digitally transforming physical operations. Real-world examples include:
A large freight carrier trained its drivers to use Samsara’s idle and fuel usage reporting solution to save 150k gallons of fuel and over $500k a year by reducing the time spent idle.
A waste transportation company reduced speeding incidents by 58% along with driver turnover, saving $500k in reduced insurance premiums.
ArcBest, the 14th largest for-hire fleet in the United States, uses the Samsara Vehicle Gateway to collect data, saving time and maintenance costs.
A large city government reduced fleet downtime by 28% by using engine fault code alerts.
A crane, rigging and heavy transport company used Samsara across 2,000 equipment assets to monitor real-time diagnostics. This kept the fleet active, boosting revenue.
To support existing companies and attract new business, the company has to be ahead of the game in developing IoT devices that are compatible with a growing range of hardware, software and infrastructure. This is a costly process.
Financial and Metrics
Today Samsara has a market cap exceeding $11bn. Comparable companies include MiX Telematics (NYSE: MIXT) which has a $263m market cap, and CalAmp (NASDAQ: CAMP) at $222m.
Full-year sales to January 2021 came in at $249m, and estimates suggest this will rapidly grow to $418m for the current fiscal year.
However, the company incurred net losses of $225.2m in the fiscal year 2020 and $210.2m in the fiscal year 2021. Net losses are projected to come in at $133.4m this year.
Its future profitability is dependent on growing its customer base by selling more subscriptions and renewing or enhancing subs with existing customers.
As of October 30, 2021, Samsara had over 13k core customers subscribed to its Connected Operations Cloud, each representing over $5k in annual recurring revenue.
Samsara currently trades at 30 times revenues. That’s a very high valuation putting a lot of emphasis on future growth and success.
Is Samsara a good investment?
In recent years, Samsara has been making impressive progress and appears on track for another record year.
A secular growth trend that could help Samsara is the shift to adopting IoT technologies to save money and improve efficiencies. Industries with physical operations are still in the early stages of digital adoption.
Samsara estimates its total addressable market opportunity worldwide will be approximately $54.6bn by the end of 2021. And it projects growing at a three-year overall compound annual growth rate (CAGR) of 21% to $96.9bn by the end of 2024.
These projections are impressive but do seem rather optimistic. Although Samsara has the potential to serve a wide range of industries, its current customer base appears heavily skewed towards freight and driver fleets.
What are the risks of investing in Samsara?
Samsara expects its operating expenses will continue to rise as it plows investment into enhancing its products and marketing efforts.
In its IPO prospectus Samsara lays out clearly:
“We have a history of losses and may not be able to achieve or sustain profitability on a consistent basis or at all in the future.”
While Samsara’s losses appear to be reducing, it has stated it expects its operating expenses to increase substantially.
As well as R&D and increased marketing costs, the company will have to up its game in attracting and recruiting talent and expects to incur additional expenses linked to going public.
One big red flag investors should be aware of is its promise of stock-based compensation rewards to employees and certain non-employees.
While the promise of RSUs (restricted stock units) can motivate employees to perform, it reduces the potential share price growth for ordinary investors. Indeed, this is proving to be a big problem for Palantir (NASDAQ: PLTR) stock, and it held back Twitter’s share price for years.
Stock-based compensation has become a common hook to attract talent to tech companies, but it can suppress share price momentum. That's because it increases the number of shares outstanding thereby diluting ownership of existing shareholders. Therefore, these RSUs may have an adverse impact on the company’s ability to achieve notable profitability anytime soon.
Additional risks to the business include digital regulation policy changes, a failure to keep up with the competition, inflation, COVID, limited choice of supplier/manufacturer and the ongoing threat of security breaches or compromised data.
Is Samsara’s stock a buy?
So how does IOT stock stack up as a potential investment?
Samsara’s ambition indicates the company could continue on a rapid growth trajectory. However, its high valuation means a lot of the growth potential is already priced in.
It’s clear that revenues are rising and losses narrowing, which is a great trajectory to be on. However, the company does face macro headwinds from COVID, further investment costs and a challenging environment for tech stocks in 2022.
Nevertheless, FactSet analysts, including individuals from Wells Fargo, Cowen and RBC Capital Markets, consider Samsara a buy. It seems this is one for the watchlist.