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Samsara (NYSE:IOT) is a cloud-based company that monitors and manages fleet operations and has recently expanded to managing physical assets. Despite being a nascent company, Samsara has grown impressively, with an ARR of over $795M, and has a small market share. However, the market potential is significant, but competition is expected to increase as larger tech companies enter the market. The company's transition to focus on larger accounts may result in longer sales cycles and delays in achieving profitability. Hence, I currently maintain a hold rating on Samsara's stock.

Samsara has identified a Total Addressable Market (TAM) of $55 billion for 2021, expected to grow at a 21% CAGR to $96.9 billion by 2024. The majority of this market opportunity lies within the Connected Fleets segment, which has a TAM of $32.9 billion, while Connected Equipment and Connected Sites represent an additional $21.7 billion. The company expects the expansion of the Internet of Things (IoT) and artificial intelligence (AI), as well as increased regulation and environmental standards, to drive TAM growth.

Gartner estimates the Telematics market size to be around $33 billion in 2021, with a projected CAGR of 25% to reach nearly $64 billion in 2024, fueled by a greater emphasis on fuel efficiency and IoT growth. IDC predicts the number of connected devices will increase from 33 billion in 2021 to 55.7 billion devices by 2025, with over 400 million vehicles having embedded connected devices by that year. By tapping into existing sensors, Samsara can reduce hardware costs and expand margins while capturing more data.

Samsara

Samsara offers software solutions for physical operations across various sectors, including construction, field services, utilities and energy, wholesale, government, and more. These sectors represent almost half of the GDP, and no single industry dominates the company's customer base. Samsara began in 2015 with fleet management, providing customers with in-vehicle technology that connected to their cloud platform for compliance, safety, fuel management, navigation, and routing. The company's "plug-and-play" solutions are easy to install, with a customer success team available to assist with any issues. The company operates on a highly visible subscription model, with ~98% of revenue coming from 3-5 year average contracts.

Samsara's cloud platform is built on AI and machine learning and is capable of processing the six trillion data points collected by the company in FY23. The value lies in the analytics that Samsara provides to its customers. Despite being a relatively young company, Samsara has become one of the market leaders in the space, with over $795M in ARR reported in the last quarter. This implies only a fraction of the market share and high market fragmentation.

Samsara's solutions are designed to benefit industries that rely on transportation and logistics, making them highly relevant in today's world. Additionally, the company's broad customer base across multiple industries means that it is well-diversified and less likely to be impacted by any single sector's economic downturn. Overall, Samsara's success is based on its ability to offer easy-to-use, data-driven solutions that can help customers increase their operational efficiency and safety.

Samsara's "core" customers, who spend over $5K per year, account for around 95% of its ARR. When Samsara was a new player, it focused on acquiring non-core customers, with a large number of them currently paying less than $5K per year. However, as Samsara has grown, it is now prioritizing up-selling to its higher paying clients, resulting in natural churn of non-core customers through anticipated price increases during the contract renewal process. This natural churn is necessary to better utilize the time of the existing sales team. Currently, over 1K customers generate over $100K per year for Samsara, with at least 51 customers spending over $1M per year. The company is transitioning its focus towards bigger accounts, which may result in longer sales cycles (up to three years) and require up-front investment in hiring and training a capable sales team. Overall, Samsara's success relies on its ability to up-sell to existing customers while also attracting new high-paying clients.

Samsara

As Samsara's ARR has reached $795M in 4QF23, I believe the company's focus has shifted from customer acquisition to cross-selling products. Non-core customers, who contribute less than $5K of ARR per year, are expected to approach 0% of Samsara's customer base. In the early years, Samsara may have focused on acquiring small, non-core customers to establish credibility and receive feedback. However, as customer contracts typically span 3-5 years, low-paying non-core customers are expected to naturally churn out as Samsara proposes higher price points. Meanwhile, the number of high-paying customers is expected to continue expanding. As Samsara goes up-market, its sales cycle may also extend. Overall, Samsara's growth trajectory will depend on its ability to cross-sell to existing customers while attracting new high-paying clients.

The competition in the operations monitoring and management space is increasing, with established players shifting from hardware to a software-focused sales model. Major tech giants like Amazon are also showing interest in this space through their subsidiary AWS IoT FleetWise. Telecom companies like Verizon (through Verizon Connect) and AT&T (through AT&T Fleet Management) are also participating. Despite the competition, Samsara offers a superior solution with a wider range of services on a single platform, which is reflected in the higher starting price for its monthly fees.

The secular growth opportunity to modernize existing fleet management solutions and expand into equipment, sites, and more physical operations should provide a backdrop that allows Samsara to expand at a high pace. The company has been able to grow its topline at a CAGR of 52.6% over the past two years, driven by growth in customer count and adoption of additional modules by existing customers.

Samsara

I believe the company will be able to grow at a high double-digit rate over the next five years. I expect that will come with improving operating leverage, especially following fiscal 2023 after the company absorbs a full year of public market costs.

Samsara has been able to rapidly expand its gross margin in recent years, with a non-GAAP gross margin of 72.1% in 4Q22, up from 69.8% in FY21 and 59.7% in FY20. The cost of revenue is mainly due to hardware costs, including the amortization of IoT devices, cellular-related expenses, cloud hosting, and personnel costs. As the company expands into Sites and OEMs embed more sensors into their models, there will be a decreasing reliance on hardware. Samsara is also expected to renegotiate its cloud hosting fees with AWS as it becomes a larger customer. However, despite these factors, I anticipate a more tapered gross margin expansion in the future, with a projected gross margin of 73% by FY26. Overall, the expansion of Samsara's gross margin has been impressive, but its future growth may be impacted by changes in the market and its ability to adapt to those changes.

Y-Charts

Samsara is currently experiencing losses, but its potential for extensive top-line growth is attractive, given the low penetration of the industry. However, there are concerns about increasing competition and interest from major tech companies in establishing a greater IoT presence in the physical world. This may require Samsara to invest more heavily in its salesforce, increasing S&M expenses and potentially delaying profitability targets. Additionally, economic headwinds may lead to customers becoming more price sensitive, potentially driving down the average pricing for fleet management services. Overall, while Samsara has significant growth potential, it also faces challenges in a competitive and rapidly evolving market.

Samsara is a cloud-based operations monitoring and management company that specializes in fleet management. The company has recently expanded its offerings to include software solutions for the management of physical operations assets such as equipment and sites. Despite being a relatively young company, Samsara has achieved remarkable growth, with an ARR of over $795M, making it the fastest-growing company in the space. While Samsara's impressive results make it one of the largest players in the industry, the potential addressable market is huge, indicating that the company's market share is only 2%. However, competition in the industry is likely to intensify, as tech majors show increasing interest in the space, and there are only moderate barriers to entry. Samsara's business model may experience delays in turning profitable due to the competitive landscape and longer sales cycles resulting from the company's transition of focus towards bigger accounts. I maintain a hold rating on IOT and currently don't have a price target on the stock.

Originally posted here:
Samsara Stock: Impressive Growth Trajectory But Limited Upside ... - Seeking Alpha