Samsara Stock Plummets. Time to Panic?

Many investors set a limit on how many stocks to hold because they believe holding too many stocks means they can’t follow them effectively. We’re presently holding 66 stocks, 30 of which live in our dividend growth investing (DGI) portfolio – Quantigence. The beauty about a DGI strategy is its simplicity – you can largely ignore your entire portfolio unless there’s an M&A event or a company stops increasing dividends at which time you exit the position and replace it with another champion. Not so for tech stocks which require a bit more attention because things change fast. We currently hold 36 stocks in our tech portfolio and monitor an additional 400 in our tech stock catalog. The secret to tracking so many stocks lies in the cadence at which we check in – about once a year.

When checking in with a stock, we always ask our analysts to download the following documents:

• Latest 10-Q or 10-K
• Latest investor deck
• Deck that accompanied earnings call
• Transcript of latest earnings call

Usually, these artifacts will provide all the information needed to ensure things are proceeding as planned. Today, we’re going to catch up with internet of things (IoT) darling Samsara (IoT) using the above set of documents.

Checking in With Samsara Stock

Let’s address the elephant in the room – our clickbait title, “Samsara Stock Plummets. Time to Panic?” Yesterday shares closed down nearly 13%. Okay, maybe the word “plummets” is a bit strong, but it’s not the first time shares have fallen and it won’t be the last. For buyers, that’s a good thing because you can buy a quality company at a better price. It’s been nearly a year since we published our article on Samsara Stock: An IoT Leader Worth a Look and we need to check in with our holding. (Samsara is one of the 36 stocks we’re holding in our tech stock portfolio.)

The ultimate expression of panic would be selling a stock on impulse, and there are only two reasons why we would sell a growth stock – when revenue growth stalls or our thesis changes. So, has revenue growth stalled or our thesis changed? Let’s start by looking at the growth of annual recurring revenues (ARR) over time (also commonly referred to as “run rate”).

It’s often confusing to investors as to how revenues and ARR can differ, so a quick explanation is in order. ARR refers to the annual run rate we can expect if every signed contract renews at the same price and nothing else changes – no new customers, no cancels, no price increases, etc. One reason ARR might differ from revenues relates to timing. The time between when a contract is signed and money is received and recorded as revenues can be lengthy. This is one example of why ARR could be greater than revenues. Here’s how the two compare for Samsara using annualized revenues from the latest quarter:

• Fiscal Q2-2023 revenues annualized: $153.5 million X 4 = $612 million
• Fiscal Q2-2023 ARR: $660 million

ARR is a leading indicator for revenue growth and should be watched alongside revenue growth for companies that provide these numbers. Now that we’ve cleared that up, here’s a look at how Samsara’s revenues have been steadily growing every quarter – none of those “the Rona mucked up our master plan” excuses.

Samsara provides further granularity that shows how they’re able to get larger customers using multiple products. Around 70% of their 15,000 core customers (firms that have an ARR of at least $5,000 per annum) use two or more products and that number moves to 90% for customers spending over $100,000 per annum. This provides a diversification effect because a customer could cancel a product and still be a subscriber for any number of other products giving Samsara the opportunity to find out what went wrong, correct it, and win back that business.

Other key metrics to watch for software-as-a–service (SaaS) companies include the revenue buckets that highlight how well the company is upselling existing clients who represent revenue potential that’s much easier to capture than trying to get new clients. An increase in customers spending more than $1 million per year shows that the Samsara platform is capable of scaling in larger enterprises where it hopefully becomes entrenched and difficult to replace.

Another metric that’s useful to show the usefulness of a SaaS solution is net retention rate (NRR) which is consistently increasing which shows their land-and-expand model is working well, particularly within the cohort of customers spending more than $100,000 a year.

Maybe the best news in the recent earnings call was that analysts’ expectations were beaten and guidance was raised for the year. So why did investors punish the stock?

Why Samsara Stock Plummeted

In looking through the recent earnings deck along with all the collateral mentioned earlier we couldn’t find any reason to be concerned. Analysts most likely picked up on the below statement from the company made during the recent earnings call.

However, the quarter was also impacted by broader macroeconomic headwinds, which contributed to some instances of elongated sales cycles, such as higher levels of required deal approval, longer trial periods, intensified ROI validation compared to periods of stronger economic growth.

Credit: Samsara earnings call

It’s to be expected that companies will tighten purse strings when there’s a bear market, and that the sales cycle will take longer as more approvals are needed along with lengthier proof-of-concepts that can convince the highest echelon that a return on investment can be realized. That’s one thing we really like about Samsara – they save other firms money. The introduction to the earnings call is peppered with examples of how they’re saving clients’ money or making their operations more efficient. Similar to UiPath (PATH), Samsara is a firm that saves their customers money and they’ll always be able to sell solutions in good times or bad. It just might take a bit longer to get the signatures.

Investor Relations Done Right

The list of documents we mentioned earlier is filled with such rich information that we could spend hours analyzing it all. This may be one of the most impressive sets of collateral from a SaaS company we’ve ever seen so we looked to see who made that happen. Turns out it’s Mike Chang, a gentleman who left an Executive Director role at Morgan Stanley to head up investor relations at Samsara. His title, Vice President, Corporate Development & Investor Relations, implies that he does a whole lot more than proof press releases, something that’s evident in his pedigree.

People who climb the ladder in investment banking by hopping around the pond are usually aggressive Type A personalities who are competent and ambitious. Having someone of that caliber in charge of investor relations explains why Samsara does such an exceptional job of providing SaaS metrics that go above and beyond while anticipating what analysts will find useful. But you don’t need someone of Mr. Chang’s caliber to understand how important these metrics are to investors, something that other SaaS firms should seek to emulate.

Valuation and Survivability

The sort of growth we’re seeing from Samsara – 40% expected this year – usually comes with a valuation that reflects the future opportunity. Considering the firm’s SaaS metrics are solid as can be, it certainly could command a justifiable premium. Here’s how Samsara’s valuation stacks up to a handful of other large SaaS firms plucked from our handy tech stock catalog (filters: Saas flag = pure SaaS and market cap = 5 billion or higher):

We calculate simple valuation ratio for 192 stocks and the universe average is 8.3 which means Samsara stock could fall further as it gets drug down by the current bear market. More important is the company’s ability to survive based on the cash they saved up from when raising funding was a whole lot easier.

Samsara finished last quarter with $826 million in cash after incurring $135 million in losses this year. Back of the napkin math tells us they have 3 years of runway left ($826 / $270 = 3.06). In the recent earnings call the company addressed the need to focus on profitability stating, “We’ve got a number of projects underway to really accelerate our timeline to breakeven.” With gross margins in the low 70s and increasing over time, they should be able to pull this off without having to raise additional capital in a bear market.

Conclusion

MongoDB should take notes on just how effective the Samsara investor relations team is in providing us with key metrics to assess the health of the business. 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. Nothing stood out on the call as a reason to panic so the drop in share price doesn’t seem merited. It’s all short-term noise anyway, and now appears as good a time as any to dollar-cost-average into some more shares of Samsara.

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