Samsara and Palantir: Tech Giants Making Waves in IoT and Data Analytics

Samsara: Leading The Charge In IOT Solutions - A Buy Ahead Of Earnings (NYSE:IOT)

Their video-based safety technology has prevented over 200k crashes and offers AI dash cams and site visibility camera. Samsara (NYSE:IOT) is a SaaS company that provides tailored IoT (internet of things) solutions for transportation and logistics companies. This is a subsector of the market that is relatively untapped and is poised for explosive growth as artificial intelligence improves over the coming years. IOT is at the forefront of innovation in this sphere with their cutting edge technology making them an extremely compelling investment opportunity at current share price levels. While the SaaS sector has been out of favor recently due to relatively mediocre earnings, IOT has been an outlier posting a double beat in their most recent quarter. This is more of the same as they have managed to beat both top and bottom line expectations over each of the past three years. In this article I will explore IOTs current business model, some new product offerings, the competitive landscape, and finally review a discounted cash flow model I built to assess the current valuation of this firm. I currently rate IOT a buy heading into their next earnings call. Samsara's business model is relatively straight forward, yet their product offerings are complex and diverse. On the home page of their website they state that "We help the most complex organizations empower their people with a single, secure operations platform." Some of their solutions include video-based safety, vehicle telematics, and equipment monitoring. The video-based safety technology product suite includes two main product offerings: the AI dash cam and site visibility cameras. The AI dash cam uses real-time AI programs to detect unsafe driving, road hazards, and allows for "in-cab coaching." On their website, IOT claims that they have helped prevent over 200k crashes for customers using these cameras. This clearly offers a tangible benefit for large trucking operations considering the average cost of large truck accidents is $91k. The site visibility cameras are cloud-connected and offer insight into onsite activities. There are AI-driven search tools built into Samsara's cloud platform that significantly reduce the amount of time it takes to investigate safety incidents that happen on worksites. Additionally, IOT allows customers to use their existing camera infrastructure to deploy their video-based safety technology. This is a fantastic approach as it eliminates the headache of having to overhaul an entire site monitoring system. Rather, IOT allows customers to integrate their software seamlessly and for a relatively low cost. This should prompt more hesitant enterprise customers to consider onboarding with Samsara going forward. The vehicle telematics segment offers firms GPS fleet-tracking and vehicle diagnostics to improve both efficiency and safety. Some of the neat features they offer include route optimization technology which analyzes individual drivers routes and driving trends and provides personalized feedback to improve efficiency and reduce overhead costs. Additionally, the vehicle diagnostics feature helps organizations to preemptively spot issues in their fleet and provide support to drivers to avoid trucks breaking down in-route. The vehicle telematics segment also provides enterprises with filing mileage and fuel purchase reports which reduces the amount of man hours spent on these tasks. The equipment monitoring technology is incredibly cool as it gives companies an automated utilization report for each piece of equipment they choose to track. This will help management reallocate equipment based on what is being underutilized between different sites and allow them to save on the costs of purchasing more unnecessary tools. IOT recently released a new enterprise grade asset tag which is described as "first of its kind." This product is designed to give enterprises visibility into valuable assets that do not contain serial numbers and therefore are extremely difficult to track. This product uses Bluetooth Low Energy technology which allows the asset tag to communicate with the rest of a firm's network. The Samsara cloud platform will analyze the data relayed from the asset tags in order to effectively communicate the locations of these assets. I do not pretend to be an expert in technology, therefore my first question when learning about this new product offering was "Ok, what's the difference between this and an apple air tag?" First of all, these tags will support large-scale operations, which is IOTs target customer segment. These tags work with a broad network of gateways that allows the enterprise to view the location of thousands of assets simultaneously. The asset tag product is also designed to fit seamlessly within the Samsara cloud offerings, which includes inventory management and tracking systems. This reduces the manual labor required to track these valuable assets which reduces operating expenses over time. One of IOT's primary competitors is Trimble (TRMB). This company has a broader suite of offerings and is currently generating more revenue on a TTM than Samsara. They also offer solutions for logistics companies, specifically under their "Transportation" segment. They conveniently disaggregate both their revenue and operating income by both segment and geography. In FY2023, their EBIT margin in the transportation segment was 17.57%. TRMB's geographic revenue splits are very different than IOT as they only generate 64.08% of their top line in North America compared to who gets 87.68% of their revenue from the U.S. alone. I believe that this is bullish for IOT as the recent push towards nearshoring and reshoring manufacturing should boost domestic logistics industries and in turn the number of firms who need vehicle telematics offerings like Samsara. Across three different websites IOT ranked higher in every single category (sources: softwareadvice.com, Compare Samsara vs. Trimble TMS (Formerly TMW Systems) | G2, and capterra.com). From ease of use and functionality to the quality of the GPS and driver management systems, IOT is clearly the superior product. This will factor into my valuation when projecting future operating margins. The quality of the product determines the premium that firms are able to charge, and it is clear as day that IOT offers superior transportation and logistics solutions. In order to value IOT I built a DCF model with three scenarios: a conservative, base, and optimistic case. For the base case I used consensus estimates from analysts to determine revenue growth. As of now, IOT is expected to grow the top line at a 19.71% CAGR from FY2025-FY2029. This seems realistic to me given the vast array of use cases and the expected improvements in the artificial intelligence space over the remainder of the decade. Computing an operating margin was a more difficult task considering this was negative in the last full year of data (-26.68%). IOT is currently guiding for a non-GAAP operating margin of 3% in FY2025. They adjust operating income to exclude SBC, lease modifications, impairment, and legal settlements. While SBC is a non-cash expense, it is dilutive to shareholders and therefore I believe it should be included in this calculation. Since FY2022 they have averaged $214mn in SBC, which is an incredibly high figure (24.5% in the TTM ending in May). Since this expense is incredibly difficult to forecast, I am simply going to use the median to adjust this year's non-GAAP operating income figure. If we take the median revenue figure ($1.209bn) for FY2025, this gives us a non-GAAP operating income figure of $36.27mn. Adjusting this for the SBC expense gives us a GAAP operating loss of $177.73mn (-14.6% operating margin). This represents a 10% improvement YoY but still a year in which they are losing money. While share based compensation represents an expense, I believe that research and development for many technology companies should be a capital expense. Therefore I have taken the liberty of converting IOTs FY2024 R&D expense into a capital expenditure and in turn an asset on the balance sheet. This process will amortize 1/3 of each of the previous three years R&D expenses in the current year and also gives us a value for the research asset. Samsara, as evidenced in the above section, has been able to create a host of useful products and is constantly innovating in order to better serve their customers. R&D is a necessary expense and should, if done correctly, pay dividends in the future. I believe in IOTs management and their decision making, therefore I believe capitalizing R&D is the most effective way to value this company moving forward. The adjustment to operating income caused the operating margin to improve by 7.93%, a substantial boost. If we apply this to the estimate for FY2025, we arrive at an operating margin of -6.73%. Given the positive trend here, I think it is safe to assume that IOT will reach operating profitability by FY2026. I applied a 2% operating margin this year, around a 9% improvement from FY2025. For the final year of the DCF I referenced TRMB's 17.57% operating margin mentioned earlier. I view this as a solid base case scenario considering IOT offers an objectively superior value proposition and higher customer approval ratings. After discounting these projected future cash flows back to the present using the weighted average cost of capital as a discount rate, I found the optimistic scenario to be an implied share price of $43.01, which is 17.65% higher than what shares are currently trading at. Both the base and optimistic cases showed some potential downside which stems from the fact that this company is simply trading at very high multiples relative to current revenue and operating metrics. I love a great value play, but sometimes you have to be willing to pay a premium to acquire a good company before it becomes a great one. I believe that is the point in IOTs growth story we are at. Investors have bid up the price to reflect growth prospects, and now it is on management to deliver upon these expectations. The primary risk to IOT and my future growth expectations for the company is increasing competition. As of right now there is relatively limited competition, but due to the size of the industry there are sure to be companies operating in adjacent verticals who will become interested in taking market share away from Samsara. Another slightly unnerving development is the sizeable amount of insider shares that have been sold over the past 2 years. Since 2022 there has been approximately 79 million shares solder by insiders. This is relatively unusual for a company that is experiencing high growth like Samsara, but it is unclear exactly why insiders have sold so many shares. In all likelihood it could be a measure taken to diversify executives portfolios in the event shares sell off significantly for any reason. Therefore I do not believe this poses a massive risk to shareholders. While IOT is certainly not a cheap stock today, I do not believe that shares of this company are going to go on sale anytime soon considering the explosive growth projected over the coming years. If you had avoided Amazon over the past decade due to its high P/E multiple you would have missed out on the astronomical share price gains over that period. Great companies tend to be expensive, and IOT is no exception. While there may be dip buying opportunities in the future, I believe now is a good a time as any to initiate a position if you are willing to hold over the long term. This is not a short term trade and it will take time for IOT to grow into its lofty valuation (as it did for Amazon over the past 20 years). I am initiating a buy rating on this stock ahead of earnings with a price target of $43 per share.

Palantir: The Most Expensive SaaS In The Market For A Reason (Rating Upgrade) (NYSE:PLTR)

Palantir is exhibiting a masterclass in sales efficiency and is being rewarded in the market for it. I've written two articles featuring Palantir Technologies (NYSE:PLTR). I initiated coverage with a buy rating followed by a hold rating, even though the intrinsic value increased significantly from the first article to the second. With the latest earnings, investors have been giving deeper insights and hints that help us more accurately project future financial performance for the business. Since my previous articles, Palantir stock price has soared, and it is currently the most expensive software-as-a-service (SaaS) company. However, expensive does not mean overvalued. In this article, I will explain why the stock is trading below intrinsic value yet again and why I am upgrading my rating for the company. It is important to be able to differentiate pricing from valuation. Most major news broadcasts, Wall Street analysts, and individual investors confuse these terms to the point where price-to-sales (P/S) or price-to-earnings (P/E) ratios are considered valuation metrics. These are pricing metrics as they relate to the current stock price and not the intrinsic value of the business. Investors then compare the pricing to other similar businesses to derive opinions regarding the stock being cheap or expensive. These are snapshots of present or near-term future expectations against the current stock quote. For example, if you were to purchase a home, you don't value what the raw materials used for building the home are worth today while discounting for material depreciation over time. Instead, you price it by looking at what similar homes recently sold for within the same neighborhood. With that in mind, Palantir is currently trading at a premium to other similar SaaS businesses and can therefore be considered expensive. The chart below shows the P/S multiple for Palantir and closely related SaaS businesses. However, looking at current results is not too interesting for a company where most of the value is terminal, meaning beyond analysts' projection models. Palantir is such a company, and I will value the business in this article. Before we reach that point, let's look at current performance and why Palantir is justified in having a premium in the market on a pricing basis. After all, current financial results are used to extrapolate future projections for a valuation. The 2024 Q2 earnings report was recently released, and it has reiterated the continuous reacceleration of various key parts of the business. First, top-line revenue grew 27.15% year-over-year (YoY) off the back of a weak comparison period the year prior. Q2 of 2023 was the bottom in terms of YoY growth rate for Palantir, and it has been accelerating since. Palantir was a hot name as the company did their direct public offering (DPO), with promises of 30% compounded annual growth rates (CAGR) for many years to come. This made for lofty valuations as analysts used large growth rates in their models. However, as the growth started to taper off, so too did the stock price. At the time of reporting the 2023 Q2 results, revenue growth was only 12.75% YoY, and the stock price was trading at around $7.50. As the following quarters saw an acceleration, so too did the stock price. The weak quarter in particular set a bed for impressive rewards to reap as it serves as a weak comparison period for 2024 Q2, which is the quarter we just had. The re-acceleration story is not only tied to the weak comparison period. Even if we normalize revenue growth for the 2023 Q2 period, the top-line growth rate would still come in at ~24% revenue growth for this quarter. That would mean that Palantir is still on a healthy, accelerating growth trend. To understand the top line better, we need to look under the hood of the components that make up the total revenue. If we peel back the first layer and look at the commercial and government revenue individually, we can see that both are exhibiting YoY accelerations. This is healthy, and what you want to see as an investor is that the whole business moves along on a healthy and upward trend. If there is a single outlier to credit all the growth to, that may introduce risks to the business. This specific chart also shows us what caused the weak comparison period in 2023 Q2. Specifically, commercial revenue declined from $236 million to $232 million, which sets up a strong growth quarter for the commercial side of the business. While Palantir operates globally, a majority of both commercial and government revenue stems from the U.S. as of the latest 10Q report. U.S. commercial makes up 52% of the total commercial revenue, up from 50% the previous quarter, and U.S. government makes up 75% of total government, down from 77% the previous quarter. We already identified that the commercial revenue was the primary drag 12 months ago. That was also in a period where the Artificial Intelligence Platform (AIP) was in its infancy and had yet to leave its mark on Palantir's business. There has been intense growth within the commercial space for Palantir since the launch of AIP and the bootcamp concept. During bootcamps, Palantir hosts building sessions on its AIP platform, a smart and efficient way to let customers get a hands-on experience of the product. Since bootcamps started scaling up, so too has the U.S. commercial customer count. With AIP bootcamps scaling up and with the weak comparison period in mind, Palantir recorded 54% U.S. commercial revenue growth Y/Y... ...as well as a very impressive 83% increase in commercial customers Y/Y. And finally, if we look at the total number of customers, they grew ~41% YoY. It may seem like a lot to digest back-to-back, but the previous three charts display similar characteristics. YoY growth is strong because the comparison period was weak, and the quarter-over-quarter (QoQ) growth is significantly slowing down compared to the previous periods. One period of slowdown QoQ is not yet a cause for concern, but it is strange considering the continuous ramp-up of AIP bootcamps. Palantir has roughly doubled the amount of bootcamps hosted each quarter since 2023 Q4, which should have resulted in an accelerated increase in customer count growth as well. It needs to be noted that Palantir has a drag on its revenues. The special purpose acquisition company (SPAC) investments from 2021-2022 have been providing a big boost to Palantir's revenue. At times, income from the contracts resulting from the SPAC investments has reached 32% of the total U.S. commercial revenue as well as up to 10% of total revenue. These only made up 3% of U.S. commercial revenue and 1% of total revenue in 2024 Q2, meaning it is a major drag. If we look at total revenue and U.S. commercial revenue excluding SPAC income, the growth rates are 30.17% YoY for total revenue and 79.21% for U.S. commercial revenue. This is the organic growth of the business and therefore a much more important figure to track. It's a very positive sign seeing Palantir back to above 30% growth organically. While net addition of customers had a weaker quarter, the same cannot be said for the amounts of deals closed for Palantir. The company closed the second-most deals in a single quarter while also noting the best quarter for deals closed of at least $10 million. The large deals had an impact on scoring the first increase in average revenue per customer, excluding the top 20 customers. The reason I exclude the top 20 customers in terms of revenue is because 3% of the customers (the top 20) account for 46% of all the revenue. I normalize the average revenue per customer by excluding these and by using trailing twelve-month data. Average revenue per customer has been on a steady decline since investors could track this metric, a huge positive for the company. The cascading effect continues, as Palantir also kept the positive trend in regards to the net dollar retention. Net dollar retention speaks for how well existing customers are scaling, as it records the increase in spending from customers that have been contracted for at least 12 months. We know that AIP and bootcamps were introduced and started accelerating customer growth roughly a year ago. We also know that Palantir did not fully monetize new AIP customers due to being focused on taking market share. The coming periods should see a continued acceleration of net dollar retention growth as this cohort starts scaling into Palantir's offerings. While Palantir has been free cash flow positive for 15 quarters in a row, they have only been operationally profitable for 6. They had positive net income margins for 7 quarters due to the substantial amount of income credited to yield farming government-issued debt. Both operating- and net income margins have since been on an upward trend and scored a record high this past quarter. Palantir's reported adjusted free cash flow came in at $149 million, the same as the prior quarter. The margin for Q2 is lower, however, due to $14.3 million less cash paid for employer payroll taxes related to stock-based compensation (SBC), which is what Palantir adjusts for. I also calculate free cash flow to the firm on an SBC adjusted basis as well, where the margin came in at 17%, the same as the prior quarter. There are two more important metrics to track for this company. The first being the sales efficiency. We saw a huge boost in sales efficiency when AIP and bootcamps were introduced; therefore, we want to see that trend continuing. The way I track sales efficiency is by calculating customer acquisition cost (CAC) as well as how long it takes for each customer to pay back the CAC. The formula for these can be found in my previous Palantir article, as repeating it every time would make my articles even longer. CAC per customer is heavily impacted by the slowing down of customer count growth. While $3.7 million per customer is higher than the previous two periods, it is not cause for concern as the value per customer is higher, which is seen by the decrease in implied CAC payback months. There are two more metrics that I track to gauge the quality of a SaaS business. These are the implied magic number, which relates to sales efficiency, as well as the rule of 40, which relates to the overall growth quality of a business. The magic number looks at implied annual recurring revenue (ARR) for the current period and divides it by the previous period sales and marketing spend. This produces a ratio that tells investors how efficient the sales cycle is for the business. The formula for the magic number can also be found in my previous article. In short, above 0.75 indicates a healthy business model with efficient sales. At that stage, the business is primed to start scaling growth. Below 0.75 requires some deeper look at the underlying metrics, while below 0.5 indicates issues with the business model. While Palantir may have been in trouble prior to AIP and bootcamps, we can clearly see the net positive effect over the past twelve months. Keep in mind that the 2021 quarters had an inorganic boost through SPACs and don't provide meaningful data. Finally, the last metric of importance is the rule of 40. This metric is commonly used to gauge the quality of a business by summing up the growth rate and the profit margin. What metric is used for the growth rate and for the profit margin varies depending on the analyst and the maturity of the business, but I use trailing twelve months of revenue growth as well as trailing twelve months of free cash flow margin. Palantir reports this metric differently in their earnings presentations, they sum up revenue growth on a YoY basis as well as an adjusted operating profit margin. The way I calculate it, Palantir is reaffirming that they are out of a drought where the business stagnated, and since being revitalized by AIP, it has been healthily above 40. As with any business, there are risks. However, Palantir is not subject to the most common risks due to multiple reasons. Palantir has thrived under both political spectrums, famously having co-founder Peter Thiel and CEO Alex Karp on opposite sides. As such, the presidential outcome should not have a meaningful impact on the business in terms of bidding for government tenders. Palantir also operates under virtually every industry out there, and as such won't be hit if specific industries take a beating. If the economy soars, Palantir will see AI spend go their way; if there's a recession, companies will want to be cost-effective, and Palantir should still see customers piling in as a result. However, no business is perfect. Palantir is set up well with a substantial cash position, no debt, and runs no risk of bankruptcy any time soon. However, the slow QoQ growth can be concerning if it is not an isolated quarter. Investors who rewarded the stock for high-growth rates after the Q2 report may not have identified the weak comparison period, and therefore might punish the stock after the Q3 report when the top-line growth rates are not matched. Understanding a story and being able to explain numbers in a valuation model is very important. Slapping flat growth rates over projection periods is not a valuation; that's an Excel exercise. Palantir is a story currently at chapter 5 of a 35-chapter book; a lot of the story is still to be told, and we do not yet know the fate of our main character. This also means that valuing Palantir is not easy or static, and as investors we need to re-adjust whenever more hints about the future are presented to us. 2024 Q2 was such a quarter, I have underestimated several parts of Palantir's story, and thus I need to value the business again. The way Palantir has solved sales efficiency and the way the margins are expanding are at a faster rate than I have anticipated. I had operating margins for 2024 through 2033 start at 13%, scaling up to 28%. The midpoint in 2028 I had previously projected to be 20%; Palantir is already about to reach that. I still have a difficult time explaining reaching above 28% operating margins for the business, but I have scaled up the prior periods by a few basis points, now starting at 16% for 2024. Bootcamp scalability may seem limited at first, as Palantir does not have unlimited personnel to keep running these at infinite scale. That is where their consultancy partnerships start to matter more. The more AIP becomes widespread, the more familiarity with the product and the possibility to scale out bootcamps to companies like Accenture and PwC, already confirmed Palantir partners. At one point, the need for bootcamps will cease as the primary function is to prove use cases and outcomes in a much shorter time than any other solution in the market can provide. Bootcamps solved one of Palantir's core issues, being able to get the product into the hands of potential customers. The software sells itself, but Palantir is still a largely unknown entity. With bootcamps, they are able to get the product into the hands of many companies, proving use cases and outcomes in mere days as opposed to a 6-12 month long integration phase with worse output from a competitor. My main assumptions for the valuation still rely on market projections for the AI software market by Precedence Research, as well as scaling up AI spend within the DoD budget (projected by Statista). These assumptions are explained in more detail in my previous articles. My discount rate of 9.48% is composed of 4.06% implied equity risk premium calculated by Professor Aswath Damodaran for the month of August, the current risk-free rate of 3.92%, and finally, my own imposed execution risk of 1.5%. The terminal growth rate used is equal to the risk-free rate. As none of us are able to predict future economic performance in the US, the next best thing is to use the market implied growth through the risk-free rate as a proxy, in my opinion. The model adjusts earnings before interest and taxes (EBIT) by adding back SBC and instead captures dilution on a per-share basis through discounted cash flow per share for each period, where outstanding shares are diluted per period. The pictured assumptions give us an intrinsic value of ~$31 per share, roughly where Palantir is currently trading. Strangely enough, the market has been fairly good at ensuring that Palantir trades close to fair value since the launch of AIP, only giving investors an opportunity to buy the company severely undervalued during the first half of 2023. Each time I value Palantir, it is trading around fair value, but my assumptions keep getting increasingly adjusted to the upside for each passing quarterly report. The 2024 Q2 report comes in three levels for investors. Growth rates look amazing at first glance -- an acceleration through the most important key performance indicators. On the second tier, investors can identify that the comparison period of 2023 Q2 was particularly weak, setting up the bed for all the impressive YoY growth rates while throwing up a cautious eye on the slowing QoQ growth rates. On the third tier, where you are after reading this article, we can see that the business is, in fact, firing on all cylinders and continuously improving the underlying core of the business. Sales efficiency metrics are showing investors that bootcamps are a scalable way to get the product into the hands of all-size businesses. In particular, while this quarter slowed down the customer acquisition rate, they also scored the most amount of $10 million or more deals in Palantir's history. The net dollar retention rate continues to accelerate now that initial AIP customers are starting to scale. The CAC increased, but the CAC payback time decreased, showing healthy levels of sales and marketing spend for rewarded implied recurring revenue. Margins keep expanding, accelerating at a faster clip than my previous forecast, which also pushes up my intrinsic valuation of the business. Organic revenue growth is already back to 30%, with U.S. commercial reporting an outstanding ~80% YoY growth rate if we exclude the SPAC contracts. Palantir may be trading as the most expensive SaaS on the market right now, but that does not mean that it is overvalued. The business is getting more robust with each passing quarter, and I believe that the next quarter will drive intrinsic value up even further. The company trades at fair value using my assumptions and justifies a buy rating in my books; therefore, I have upgraded the rating from a hold to a buy.