Description

Samsara is a leading provider of telematics solutions to fleet and industrial customers globally. Founded in 2016, Samsara has grown rapidly, and reached nearly $1.2bn in ARR as of its Fiscal Q125 ended April 30 2024. Samsara's rapid growth, "$200 billion TAM," and exciting story around becoming the "system of record" for operational intelligence has caused it to trade at a premium valuation to all telematics and IOT peers and ahead of many SaaS peers. On FY25, Samsara trades at roughly 15x EV/S and 350x EV / EBITDA. We believe this valuation makes little sense in light of Samsara's low quality revenue mix, relatively mature category penetration and an incredibly intense competitive landscape, along with certain accounting and litigation red flags that the Street seems to be underestimating. We believe Samsara (ticker "IOT") will likely trade under $10 at some point in the coming 24 months, from $34 today.  

The Bull Case

The bull case on Samsara and other telematics companies is that providing visibility and telemetry to companies on their physical assets has an incredible ROI and this ROI will only be enhanced by AI. In theory, nearly every fleet in the world could benefit from deploying telematics and dashcams to get the benefits of reduced accident frequency and resultant insurance savings, and to be able to optimize fuel savings and overall enterprise efficiency. Samsara is also taking this approach outside of traditional fleets to offer asset tagging, site monitoring and other features. Samsara claims there is strong demand for a "single pane of glass" to consolidated operational visibility across an enterprise with one vendor. Samsara purports that they are competitively advantaged and are uniquely situated to provide this single pane of glass. So in their vision of the future, they are monitoring all of an energy company's fleet plus their production sites.         

Evolution of the Telematics Market

The telematics market has grown at a rapid pace over the past two decades. Earlier pioneers of the space included companies like Omnitracs, Fleetmatics (FLTX), CalAmp (CAMP), Trimble, Teletrac, Nextraq, Fleetlitics, Fleetboss, Fieldlogix, Lojack, Gotrack, Verizon and others. I pulled this list up from my old FLTX model, and FLTX was bought by Verizon in 2016. In other words, Samsara did not come up with this idea. In the first generation of telematics, most of the focus was on deploying electronic trackers (ELDs) on vehicles and selling a subscription console, basically a map with some analytics to let companies keep tabs on their drivers and work on route optimization and fuel savings. Having watched Samsara's investor day, the monitoring features they are demo'ing are honestly not that different from the mapping features Fleetmatics showed at investor days eight years ago. The value prop here is simple and easy to understand, and the offering is commoditized as evidenced by the above list of competitors. We were short FLTX on and off and did well in it and dodged the VZ buyout, because the space was commoditized, FCF conversion was poor (hardware gets bundled with the mapping "software" hurting cash flow, deals get discounted and customers get favorable payment terms etc) and we did not believe it deserved to trade on a big revenue multiple. The interesting thing is that back then, the TAM was maybe 20 - 30% penetrated in the US and much less so abroad. Today, ELDs are 80 - 90% penetrated in the US and maybe 50% penetrated in T1 markets abroad. This is the opposite of a greenfield growth opportunity. 

The new growth opportunities in telematics have come from integrating rear-facing and in-dash cameras for driver monitoring, and future growth is to come from site surveillance, and "asset tagging" (kind of like airtags but industrial grade to make sure certain equipment is working and not getting stolen). These opportunities are in the much earlier phases of penetration, perhaps 10% penetration for in-dash cameras and more like 50% for rear-facing, and very early days for asset tagging (Samsara just announced its product). Site surveillance is an adjacent market with very strong incumbents like MSI / Avigilon, Solera, Honeywell, AT&T and Verizon.  AI is being used to add more insights and efficacy to all these products. All vendors we have come across in the market are offering AI enhanced products not just Samsara.

Competition

While consolidation has occurred in the telematics market, for example VZ buying FLTX, Lojack merging with CalAmp (CAMP recently filed for Chapter 11 and will be run by its controlling debtholder, a development we expect to yield better performance for CAMP going forward), Powerfleet (PWFL) merging with MIX Telematics (MIXT) and a host of other smaller or less prominent deals, there are still far too many players and new ones pop up all the time. "Next Gen" telematics companies that did not yet exist or were much smaller when we were last doing work on the space include: Geotab, Motive, Lytx, and Netradyne, all of whom appear to have very robust capabilities and impressive customer rosters. For example, Geotab won the USPS (a deal Samsara is contesting) and is vendor of record for the US government / many federal agencies and fleets, NYC, and a host of F50 companies. Motive claims over 120k customers and a 60% growth rate in enterprise ARR and 160% growth in >$1m customers, with partnerships with XOM, Caseys, Loves, 7 Eleven and other trucking stops. Lytx offers a platform that looks very similar to Samsara and previously won Walmart and Kroger as customers. Netradyne is the provider to Amazon. And there are a whole host of other players.   

Importantly, there really doesn't seem to be a high degree of differentiation between these vendors. If anything, while admittedly a sales and marketing powerhouse, it appears Samsara is a weaker player technically and from a GTM perspective than Geotab, and weaker technically than Netradyne and Motive. Ingesting data from commodity ELDs and cameras and overlaying a map with some sortable / dashboardable insights should not be a 15x EV/Revenue business at 5% fed funds. We think these guys are coasting on some fundamental misperceptions about what their business really is and how differentiated they are.

Questionable Unit Economics

As opposed to other true SaaS businesses, the telematics industry has poor unit economics. There are too many players and the products are all hardware intensive and commoditized. Contracts are typically 1 - 5 years and replacement of the hardware makes the business more capital intensive than traditional SaaS. Pricing is also certain to follow a downward trajectory with a million vendors chasing RFPs, and while ARPU growth has been driven by the proliferation of new offerings like in-dash, we don't see the penetration curve exploding as rapidly for in-dash as it did for ELDs due to higher cost and no government mandate unlike for ELDs, which were mandated for the trucking industry by the Federal Motor Carrier Safety Administration (FMCSA). By comparison vs. ELDs, in-dash cameras are FAR more controversial with certain unions like UPS banning them in contracts due to perceived privacy invasions.  

Samsara's GM is relatively impressive at 77%, but operating leverage below the line has been far more limited with GAAP operating profit of ($66m, -25% margin) in the most recent quarter and FCF of $18m (6% margin), which is quite lame for a "SaaS" business at this scale. Balance sheet billings have slowed to 33% growth in the most recent quarter and ARR growth ticked down to 37%, while revenue only beat guidance by 3%, less than in prior quarters. Management is signaling their guidance will now be less conservative as they have more visibility on the business AKA we are decel'ing and next year we plan to blow you up.

About half of Samsara's business comes from SMB and half from customers over $100k ARR, which is still far below enterprise scale. From perusing transcripts and social media, it seems Samsara runs an intense inside sales operation a la HUBS, YELP etc, hence the GAAP sales and marketing cost of over 50% of revenue. There are rampant discounts, contract buyouts, early hardware replacement offered given the competition in the industry. We were long HUBS as while they were spending like crazy they were at least truly selling software and adding decent LTV contracts and building scale, awareness and product leadership to reach the upper midmarket and enterprise over time. AXON did it (and we were first short and then pivoted) but they were adding a second monopoly to their first one. Running 50% S&M to acquire a ton of SMB / SME fleets and hoping to become "system of record" and the single pane of glass for physical assets, when companies like Geotab, Verizon, Motive, Netradyne and others are already there and in many cases are ahead of you, just seems reckless to us. If you watch the investor day, it will stand out to you how much Samsara really tries to cast themselves as standing apart or being innovative with the relatively pedestrian products they offer -- and it is also telling that their "big unveil" was a ruggedized industrial airtag, that Goldman of course ascribes a $50bn TAM to. Story does not match reality.

 Terminal Value Risks

We also think that Samsara, and all telematics vendors, have terminal value risk from OEM integrations and ADAS / Autonomous driving features, which stand to obviate or greatly curtail the necessity of these largely aftermarket products. JPM, who has a neutral on Samsara recently hosted an insightful interview with Geotab's CEO that went into great detail on the risks of OEM competition. Basically, as these features become endemic to the vehicles themselves, all of the data and many of the value added capabilities will be delivered by the auto OEMs and their T1 partners themselves. Not a great world for Samsara. Clear terminal value risk that is developing quite rapidly and is not reflected in the frothy valuation multiple, in our opinion. The TSLA solves Autonomous crowd and MBLY crowd should love shorting Samsara as a pair on these high multiple names. In many cases the carriers (Verizon, AT&T) are also competing here with baked in advantages on connectivity costs.    

Red Flags

Apart from the foregoing, Samsara has some pretty significant red flags. They seem to keep losing on independent studies or losing contracts and then suing people. For example, Samsara lost the USPS deal to Geotab and has been contesting it in what seems like a proforma, likely to lose challenge. The Motive countersuit against Samsara, who had alleged patent infringement by Motive, is worth a read to get the flavor of who these guys seem to be. The Virgina Tech Study cited to by Motive looks awful for Samsara.   

Spruce Point Short Report        

Spruce Point admittedly laid out much of the above in a short report last year, though we only came across it after we had already been looking into Samsara for some time. The genesis for working on Samsara was actually looking into PWFL / MIXT as a long, which is a very interesting idea but arguably better as a pair vs. Samsara. As they so often do, Spruce turned over some good red flags themselves, including potential overstating of Samsara's GM by 1200bps due to underexpensing of product costs and sales commissions, that Samsara's audit chair currently serves on ten boards, heavy insider selling that accelerated recently, the CFO not being a proxy NEO (which is very weird) and that Samsara hosted a special audit commitee meeting in FY2023. Having spent time around ACs, it is notable to have a special meeting specifically called out in the proxy and there's likely a story there. It's also virtually impossible for an AC chair to be hands-on in a dynamic, fast changing and challenging situation if they are on ten boards, no matter how great they are. They are going to heavily lean on and defer to the CFO / CAO, who in this case are relatively green and, as Spruce notes don't maintain active CPAs and are not NEOs.      

Acquisition Risk

The risk with a short like this (if it isn't a true open ended category killer) is always getting taken out. Peak Telematics takeouts on an enterprise value basis have been in the $2 - $3bn range, vs. Samsara at $18.5bn. Also, on EV/S, peak multiples have been around 7x trailing (VZ for FLTX). We don't see a takeout as a reason to cover until they get religion on profitability and the stock is sub $10. 

 Macro Sensitivity

There is macro sensitivity here, as ~90% of Samsara's revenue is in the US and the bulk is tied to fleets. Rigth now, we don't think that is a good thing as you are downcylcing in the industry and have a challenging stack of comps, inflationary pressures causing more cost sensitivity, and you are comping the ELD mandate that drove outsized growth. Macro improving / rates coming down would help them though. 

Catalyst

Revenue growth continues to decelerate. Motive lawsuit causes investors to question the multiple Samsara trades at. Investors question hardware sensitivity of the model. Some type of accounting scandal occurs. Profitability ramp does not materialize.