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Investment Thesis
Samsara Inc. (NYSE:IOT) is the most expensive stock in my Deep Value Returns portfolio. I am very cautious with valuations, but I believe Samsara is an exception and worth every penny of the asking price.
I know you expected me to say this, or that this is unfair, or something like that, and all of this is true.
Meanwhile, the market has seen a backlash against many SaaS stocks due to their valuations.
And this makes sense. On the surface, IoT isn’t cheap at 15x this year’s sales. But this metric almost completely ignores much of its prospects. First, it doesn’t even take into account the fact that this business is already generating robust free cash flow despite growing at a 30% CAGR.
In fact, following IOT’s earnings announcement on June 7th, I said:
The problem is, we know from experience how things will play out over the next week or two: stock prices will fall, they will stabilize, and within 30 days they will start to rise again.
And what happened?
Data by YCharts
The thing is, this is a really attractive business, growing at a 30% CAGR and with over $1B in revenue. This kind of business demands a premium valuation. With these fundamentals, this business is definitely not going to be sold as a bargain.
Price target: $60 per share by summer 2025
Samsara’s Short-Term Outlook
Samsara helps large organizations manage and improve their physical operations by leveraging technology to make operations safer, more efficient, and more sustainable. The company offers tools like video-based safety systems for fleets of vehicles and digital forms that replace outdated processes. The company’s products help businesses reduce fuel costs, prevent accidents, lower maintenance expenses, and improve overall productivity. For example, the company works with companies like Nutrien Ag Solutions to improve driver safety and Frontier Communications to save fuel and reduce carbon emissions.
Samsara’s future looks promising, driven by its ability to address challenges in asset-heavy and labor-intensive industries, such as fuel savings, workplace safety, maintenance and insurance costs. The company’s innovative approach, which includes the implementation of video-based safety and telematics applications, has demonstrated its ability to increase operational efficiency and sustainability for large-scale operations.
Additionally, Samsara’s strategic focus on emerging products has strengthened its growth trajectory.
If you’ve been following my work for a while, you know that as an inflection investor, I obsess over profitability and improving customer adoption curves.
IOT 1st Quarter 2025
What we see here is that customers with over $100,000 in ARR increased 43% year over year, which is a key metric for inflation investing. In fact, I’ve said before and I’ll say it again: I believe the customer adoption curve is more important than the revenue line.
It all comes down to having demand for a company’s product. Without customer demand, a company can resort to pricing strategies that may work in the short term but will lead to failure.
Samsara is expected to grow at a CAGR of 30%
IOT Revenue Growth
In my last analysis I told my subscribers:
Samsara is expected to grow at a 30% CAGR in fiscal year 2025 (not to be confused with calendar year 2024). This is a significant growth rate. Furthermore, if Samsara achieves 30% growth this year, the business will be considered a “hyper growth” business. A hyper growth business is one that is experiencing steady and consistent growth at a CAGR greater than 30%.
As I said at the beginning, I have been through periods like this before, and I know from experience that this will pass, and in a short time, the market will boom again with burgeoning businesses.
With these points in mind, I would like to share my thesis on IoT.
IOT stock valuation — 15 times this year’s sales
In my last analysis I told my subscribers:
I believe Samsara will achieve 6% operating margins over the next 12 months, and here’s why: I believe 1Q25 will be roughly negative 2% (which is roughly in line with Samsara’s own guidance), although recall that 1Q24 (prior year) non-GAAP operating margins were negative 9%.
This means that profitability is already on track to improve by 700 basis points this quarter. And if we apply this same 700 basis points to the full fiscal year 2025, there is a very good chance that IOT will achieve a 7% non-GAAP operating margin at some point in fiscal year 2025. This is 700 basis points higher than the current underlying profitability in 1QFY25.
As it turns out, this reasoning was too conservative: IOT did not improve non-GAAP operating margins by 700 basis points. See below.
IOT 1st Quarter 2025
Profitability improved by 1,200 basis points, which is a really impressive performance. It’s not as impressive as SentinelOne’s (S) 3,200 basis point improvement, but it’s probably an all-time high in my records. Still, Samsara has achieved an impressive improvement in profitability.
In my last analysis to subscribers, I said this.
I want to leave some room for error, so I’ve decided to be a bit more conservative and target a non-GAAP operating margin of 6% for the current fiscal year. For reference, management is targeting a non-GAAP operating margin of 2%, which I strongly suspect is management trying to lowball their estimates in order to give investors some positive news as the current fiscal year unfolds.
Highlighted in bold are what management previously expected. Management now expects second quarter fiscal 2025 operating margins to be 3%.
IOT Investor Day
See seasonality above.
I believe IOT will further increase this guidance, if not next quarter, then perhaps the quarter after. After all, the company just surpassed its own previous operating margin guidance by 500 basis points. It shouldn’t be difficult for the company to increase this operating margin by another 300 basis points before the year is out.
IOT 1st Quarter 2025
My arguments for IOT are: IOT is still growing rapidly, making it difficult to price on a free cash flow basis. The company is not looking to maximize profitability – not yet. The company is seeking to grow and gain market share in an industry poised for disruption. The company is profitable, generating free cash flow, and has no debt on its balance sheet.
But the business is clearly moving forward, and there’s no doubt management is determined to drive their share price even higher — just look at how much interest they have in the business.
IOT SEC Proxy
Including the legendary Marc Andreessen.
Conclusion
In a final attempt to convince your executive team that IOT is special, let them hear their story.
IOT 1st Quarter 2025
IOT is one of that rare breed of stocks with $1 billion in sales, 30% earnings growth, and positive free cash flow over the last 12 months.
Given the market’s lack of interest in Samsara, this represents a great buying opportunity. Samsara is already generating robust free cash flow and is growing at an impressive 30% CAGR.
The company’s innovative solutions have been met with strong customer acceptance, with a 43% increase in customers spending over $100,000 annually. With over $1 billion in revenue and growing profitability, Samsara’s fundamentals are solid. The stock is poised to rise, making now a great time to invest in this promising IoT company.
