Spruce Point issues Strong Sell opinion on Samsara, sees 45%-75% downside risk

Spruce Point states: “Unlike most SaaS companies, Samsara has a material hardware business that gives the Company a uniquely poor business model subject to numerous serious risks. Based on our analysis of customer quotes and agreements, we believe hardware represents approximately 25% of the value of Samsara contracts. Moreover, our review of product datasheets finds that Samsara devices generally employ very mature technologies (little more than what is found in today’s cellphones) and that suppliers of comparable products typically garner gross margins in the low thirties. Not only does Samsara hold more physical inventory than most pure SaaS companies, but the Company’s hardware giveaway and sizeable related engineering effort weigh on Company gross and operating margins, which have historically ranked among the worst relative to peers. However, Samsara management largely avoids discussing its hardware products (sometimes even suggesting that the cash flow implications should be ignored) and represents that its reliance on hardware will decline. In contrast, we highlight that, by any reasonable metric, Samsara’s reliance on hardware has only increased over the past several years and that new product initiatives are only more hardware intensive… Samsara has always been richly valued, but the Company’s shares particularly benefited from the recent AI-induced rally, even though we find that it has historically given away its AI capabilities for free. In fact, Samsara is not even a top ten holding in the sole IOT-focused ETF despite its pure-play focus and $14 billion enterprise value. Today, Samsara shares trade at an astronomical 16x 2023E revenue, making it one of the most richly valued companies among the entire IoT and SaaS universes. We find its valuation unsupportable and unsustainable. Samsara’s IoT peers trade at an average of just 4x 2023E revenue. Moreover, Samsara embodies all the attributes that have historically resulted in lower SaaS multiples – SMB focus, hardware business, and communications focus – as those issues are known to drive lower margins and worse customer economics. Samsara’s valuation dramatically eclipses even precedent IoT M&A transactions, where multiples have ranged from 4x-8x revenue. Finally, we highlight that current and future Advanced Driver Assistance Systems (ADAS) and self-driving systems could completely displace Samsara solutions, which threatens to impair any terminal value investors are modeling to support their Samsara price targets. In our opinion, Samsara’s coming multiple compression will be severe, and we see 45%-75% downside risk.”