The best stocks in your portfolio are those that require the least attention. Software-as-a–service (SaaS) stocks are low maintenance because most provide the same metrics to assess business health. Annual recurring revenues (ARR) are the foundation of every SaaS firm and represent two growth components – existing customers that pay more over time, and revenues from new customers. The former is measured using net retention rate (NRR), a key metric that shows how effective salespeople are in upselling / cross-selling to existing customers. When a company stops reporting their NRR numbers, it’s cause for concern. That brings us to the topic of today’s analysis – Samsara (IOT).
Samsara Key SaaS Metrics
In the past we’ve praised Samsara as an exemplary SaaS firm because of all the metrics they provide and the strength of those metrics. It’s time for our annual check in with the company, and NRR is nowhere to be found. In the latest earnings call, an analyst asked about NRR to which the company responded.
Q2 dollar-based net retention rate for core ($5K+ ARR) and large ($100K+ ARR) customers remained above our targets of 115% and 120%, respectively
Credit: Samsara
The absence of this basic metric is puzzling because it forces us to look other places to ensure their solution is sticky. Fortunately, the company provides us with “revenue bucket” metrics that show expansion progress. For example, 1,515 customers now pay more than $100,000 per annum (also called “large customers”), an increase of 53% from the same quarter last year. Like other large SaaS firms, Samsara is breaking down their offering into modules or products with 93% of large customers subscribing to 2+ products and 57% subscribing to 3+ products.
About half of Samsara’s revenues now come from customers paying them more than $100,000 a year with 60 customers cresting the $1 million mark.
Management says that “most of our expansions comes from customers rolling out more licenses across a broader set of assets, whether that’s new subsidiaries or new geographies.” Ideally, we’d like to see more expansion outside the United States. This quarter, international revenues moved from 11% to 12% compared to the same quarter last year which means Samsara continues to be over reliant on the United States. There may be a recession affecting the U.S. economy, but you wouldn’t be able to tell by looking at Samsara’s accelerating growth.
Sailing Into Macroeconomic Headwinds
The bear market isn’t behind us yet, and a consistent theme among SaaS companies is the impact of macroeconomic headwinds that cause customers to tighten purse strings. Firms that raise guidance during such times typically provide solutions that save their clients money. Samsara’s Letter to Shareholders (one of the many rich artifacts accompanying their earnings call) emphasizes how they’re able to reduce costs and improve efficiencies by delivering “clear, rapid ROI for the world’s leading and most complex physical operations organizations.” Resilience to macroeconomic headwinds was explained by three factors:
Samsara’s subscription model is based on a customer’s physical assets as opposed to headcount-based pricing. This results in a lower risk of revenue contraction if customers’ hiring slows.
Salespeople typically sell into the Operations budget for their clients as opposed to the IT budget. It’s typically large and less discretionary as opposed to IT budgets which often get trimmed when purse strings tighten.
Most importantly, customers deploy Samsara to generate hard savings – reducing fuel costs, lowering maintenance costs, increasing asset utilization, and reducing accidents. This often results in a quick investment payback period measured in months which spurs further adoption.
The market seems to have an uncanny ability to sniff out sentiment, and Samsara’s strong quarterly results and guidance raise were anticipated by the market with valuations creeping up to match the forward-looking optimism that permeated their latest earnings call.
Samsara’s Increasing Valuation
Close to a year ago we published a piece titled Samsara Stock Plummets. Time to Panic? which concluded that “all the trends are moving in the right direction and the valuation isn’t half bad when compared to other SaaS firms in our tech stock catalog.” Our recent video on A Simple Valuation Ratio (SVR) described how we can use market cap valuations from Yahoo Finance to calculate historical valuations for any stock. Here’s how those numbers look for Samsara.
An objective valuation target would be to take the average of the past five quarters – 12 – and only purchase shares below that target. Intrinsic value hasn’t changed, but analyst expectations have. With growth of nearly 40% expected for this year after the company raised guidance, any disappointments will send Samsara’s share price back down to the mean.
Another SaaS metric we introduced recently is the SaaS Rule of 40 which Samsara has now managed to eclipse over the past three quarters, a sign that they’re able to balance growth alongside profitability.
A positive cash flow – which Samsara expects to continue indefinitely – means that the $724 million in cash and investments they have on hand will only continue to grow. Perhaps they’ll look for some bolt-on acquisitions in areas like predictive analytics.
It’s All About Big Data
Once it works, nobody calls it AI anymore. In the same fashion, those who talk most about generative AI are probably doing the least with it. Samsara’s latest earnings call is refreshingly void of any AI mentions, though their investor deck spells it out in just several slides. It’s all about the data.
Softbank’s fearless leader spelled it out best when he said that the IoT sensors of tomorrow will drive the AI algorithms of today. Samsara’s solution is industry agnostic with no single one accounting for more than 22% of total revenues.
Each of the above industries will allow for vertical data analysis where all participants can contribute anonymized data to produce insights that everyone can benefit from. Perhaps the biggest asset Samsara has would be all the big data being generated by the assets they’re tracking. None of this “build it and they will come” stuff. Samsara plans to start by identifying problems their customers have to solve, then using data to solve them. It’s another reason to like this business, though we’re not here to make the bull case. Being the risk-averse investors we are, it’s all about looking for areas of concern when we do our annual check ins. Since we can’t find any, we’ll look forward to seeing how much they’ve accomplished a year from now.
Conclusion
We’ve already maxed out our position in Samsara so no action is needed. For those investors eyeballing the company from the sidelines, set an objective SVR target and stick to it. Investors expect Samsara to perform flawlessly, and any setbacks will be punished accordingly. Our optimism surrounds a product offering that creates efficiencies and realizes a return on investment measured in months, not years. Operational improvements impact the bottom line and will find support from all C-level types. In the longer run, Samsara can feed all that delicious big data to hungry AI algorithms that can add even more value to the platform.