Why I ignored my personal rule of no positions over 20%

Investment Analysis Clubs Saul’s Investing Discussions
1

Why I ignored my personal rule of no positions over 20%.

Well it’s been a long time since I’ve had as much confidence in a company as I have in this one. I am truly in awe of how they have extended the marketplace and the TAM of a company that was already doing very well selling monitoring of truck fleets and selling a lot of hardware to do it. Now they have expanded into selling platforms and their gross margin is at 75%. I thought that their recent quarterly results and announcements were awe inspiring.

After all, two months ago they announced that the City of Houston, the fourth largest city in the US, had become a client… and now they announce that New Orleans had signed up for 41 departments.

They had also signed up a major airline some time ago, and a speaker from that airline was present at their customer conference five or six months ago with representatives from other airlines in the audience, and now a large discount airline signed up too.

There are a lot of cities out there, and they learn from each other, and a lot of airlines out there also, and they learn from each other too.

Well I wanted to see if the ten analysts asking questions at the conference call were as awe-struck as I was. Here are some slightly paraphrased quotes from what the Goldman Sachs guy said. Tell me if he doesn’t sound as blown-away and awe-struck as I am !

“That’s an unbelievable benchmark you’ve reached. Very few companies have been able to grow at that pace and hit a $1 billion in revenue and keep the momentum growing…

“The non-transportation mix of net new ARR is very high. Clearly, the end markets are diversifying and opening up in ways that I at least had not thought about. What does that tell you about the TAM for the company? Because it’s no longer just the fleet management, telematics type opportunities. It’s something much bigger than that…

“How do you think about the product strategy and go-to-market strategy as with time it really becomes something different and bigger than what I, at least, thought it was, which was more telematics and vehicle-related? But it seems like your process workflow automation works for many kinds of business processes that are outside of the core domain…
“Congratulations ! Thank you so much.”

And here are brief slightly paraphrased excerpts from some of the other nine analysts. It’s been years since we’ve read a transcripts with that universality of amazement and praise, if ever. At any rate I’ve built my IOT (Samsara) to a 22.3% position.

Wells Fargo: “just congratulations on the clean results”

RBC: “Congrats from me as well. The $1 billion threshold and the profitability are super exciting milestones. I guess following up on the large deal success, it’s great to hear the equipment monitoring is also over $100 million now too and growing rapidly…that’s fantastic… obviously a good quarter”

Morgan Stanley: “I’ll add my congrats too on the quarter. Really exciting to see Mobile Experience Management already cross $1 million ARR given it’s a new product.”

TD Cowen: “Thanks, and congrats on another great quarter… so I mean, you guys have just one of the highest growth rates in all of software, really impressive.”

Wolf: “And again, just sounds like a truly marvelous quarter… one thing that stood out to me was that four out of the five largest customers in the quarter were kind of net new logos and lands… you’ve been operating at a pretty high rate of execution through what some would describe as a pretty challenging macro backdrop… Congrats”

William Blair: “I will echo my congrats on the quarter.”

BMO: “…S&M expense and R&D. It’s been really impressive that you’ve been able to keep those expenses kind of flat to down sequentially for the last couple of quarters and still sort of drive really strong strength on the topline”

Evercore: You guys are now signing up a lot of customers with multiple products at the outset, which is great. I was wondering if that is just still a subset of their equipment inventory?

But please, please, PLEASE, remember how WRONG I can be, and make your own decisions, don’t follow me.

Saul

72 Likes
2

This definitely addresses the concern I’ve voiced in the past regarding whether they’d be able to leverage into adjacent opportunities; it seems I needn’t have worried.

11 Likes
3

Thanks, @SaulR80683, for sharing this and confirming that I am not alone in being thrilled about IOT.

I had a 13%-ish position the day before earnings and binge-read a full year of quarterly reports because I was unsure about holding the position through earnings.

Without going into details right now, I was as amazed as you about the positive reactions from the growing number of analysts covering IOT throughout all four earning reports.

Also, I was astonished to experience the CEO and CFO’s constant (over-)delivery of what they had promised, not only in the numbers but also in the softer aspects of their remarks. On top of that, they were evident in their messages and answers to the analysts’ questions, and I got the vibe that the CEO & CFO have an excellent relationship without too much ego between them.

I know it is fluffy stuff I am contributing, but after binge-reading the reports, I immediately topped up my initial position from 13% to 20%. I trimmed a bit after the pop back to 20%, but I am considering adding again.

Muji came out with another great write-up about IOT yesterday, and my confidence level is very high about the future of IOT. The runway is enormous going forward, with an increasing TAM not foreseen.

Again, thanks for sharing @SaulR80683

Stay safe and healthy!

Cheers,
HaikiliKona

27 Likes
4

I agree that this was a confidence building quarter, and all numbers and narrative were great. But nothing really changed for me. If on a confidence scale that goes to 5 I was already at a 4.7, maybe now I’m at a 4.8. How does that compare to my others? I mean Monday has to be in the 4+ (maybe even 4.5+) range, as do heck, even some companies I’ve sold (like Crowdstrike, which might be a 4.9). I am extremely confident they’ll do well. But I’m extremely confident lots of companies will “do well” – e.g, it would be hard to argue that Amazon or Google or Microsoft will “struggle.”

But which ones will beat the market? Well that depends on growth, which for all the companies listed above, including Samsara, is slowing. (It also depends on price.)

I just can’t fall in love with any companies right now, even the ones with very good numbers…because even the highest confidence companies (like Samsara and Crowdstrike) are not only slowing, but slowing into the 30’s and eventually lower growth rates. We don’t have 4.5+ confidence companies growing at 70% or even 50%+ anymore.

So when we get a 50%+ increase in the stock price in just over a month ($23 to $35 for Samsara), I’m not adding to the stock; I’m trimming. What are the range of outcomes here? How likely/possible is it that it just gets more and more expensive forever? What’s the justification for another 50% increase? Revenue isn’t even growing 50%.

After the last several quarters when Samsara has spiked, it’s always come back down. Euphoria and hope has eroded and doubt has crept in. That’s just kinda how the market works. I’ll be ready to add back if that happens, but at $35, I’ve trimmed Samsara to be my smallest position. I’ve added a bit to Celsius and even some back to ELF (although it’s already a large position) since they’re growing so much faster and have much lower multiples than Samsara – although, again, I acknowledge that Samsara is a 4.8/5.0 confidence (or so), and for me Celsius and ELF would probably both be below 4.0 (Still good but not as high as Samsara or Axon or even Monday). That’s the trade off we have to make these days in my opinion. High growth, or high confidence. Would love to have both, but we don’t. So why concentrate into any one company too much?

So I guess in summary, I agree completely that Samsara is a very high-confidence company. But I don’t want to get carried away. I think we need another criterion besides confidence in order to concentrate into a company heavily. For me this criterion is a balance between growth rate and price. It’s not a perfect science, but it’s something like a PEG ratio for revenue. For a SaaS company, if revenue is growing 70% and the PS ratio is 25, maybe that’s not a problem, but if revenue is growing 35% and the PS ratio is 35, that’s a problem – either revenue will need to accelerate or the PS ratio (and share price) will need to come down.

Bear

97 Likes
5

in addition to QoQ and YoY revenue growth rates. I also compare next year rev forecast to 3 year out forecast.

for IOT it is 919M (FY23) and 1740M (FY26) which indicates 89% growth.

same metric is 125% for sentinel one and monday. 97% for datadog.

this kind of tunes out noise that some companies maybe able to grow very fast in near term but when you look at longer term forecasts. you know it can’t keep growing at those rates.

enph is at only 30% for same period for instance.

14 Likes
6

Hi Bear, You are correct to be cautious of course, but revenue is growing at 40%, not 35%, and the EV/S ratio is 19, not 35. :grinning: (I used current quarter run-rate, current quarter times four, not a guess at forward four quarters, to be conservative. )

So when we get a 50%+ increase in the stock price in just over a month ($23 to $35 for Samsara)

You are cheating and figuring from the bottom of the October debacle for all our stocks. Samsara was at $31 near the end of August. That gives a 12% rise in 3 months plus.

And you are not taking into account how the business is exploding into new area, wherefore all the "exciting"s and "marvelous"s and "Impressive"s and "fantastic"s and "congratulations"s from the analysts. I haven’t seen anything like that from any other company.

But who knows?

Saul

73 Likes
8

Here is something relevant for the growth/valuation discussion:

Matthew Hedberg

That’s fantastic. Thank you for that. And then Dom, one for you. Obviously a good quarter, you raised guidance for the year. You didn’t comment on fiscal 2025. And I’m curious as we sort of start to think about sharpening our pencils for next year on modeling assumptions. Are there any details that you can share on, maybe just guideposts or how we should think about fiscal 2025 initially?

Dominic Phillips

Sure. Yes. So look –and we need to get through Q4 obviously before we finalize our plan for FY2025. But I’d say that based on our current outlook, I think the initial FY2025 revenue dollar range that we provide will be higher than the current consensus number, given that we just beat Q3 and we raised Q4. And I would also frame that as de-risked.

He is saying that they will need to raise above consensus, but even then it is still derisked. I have to admit that is as bullish as anything I’ve heard on the latest conference calls.

Based on current analyst consensus the 2025 EV/Sales (1,172M) is exactly at 15 (post todays drop in stock price). Based on the above context, it will be lower than that.

I do agree the stock is commanding a very high valuation currently. However comparing the results to the high growth peer group and valuation I’d say maybe buyable, especially if we were to get closer to $30.

9 Likes
9

As mentioned above I was thinking of adding to my already large IOT position and I did so today after the 8% intraday drop. It’s now 25% of my portfolio.

But please don’t follow me, because I’m having a high risk tolerance.

Cheers
HaikiliKona

4 Likes
10

This morning IOT was number three on Jamin Ball’s Top Ten EV/NTM revenue multiples at 16.9x. It also has a lower gross margin, 73%, than many of our favorite plays.

It is a great company firing on all cylinders but I’m keeping it around 14%ish.

11 Likes
11

Some actual significant insider selling seems to have hit the street. One I saw was 20% of their holdings. That’s a little higher than the normal “don’t pay attention” level but still doesn’t mean anything for sure.

Edit: this table has actuals

Screenshot 2023-12-16 at 10.49.27 AM

4 Likes
12

OT, but this was today:

6 Likes
13

I agree the valuation is high, and the market is also too hot lately, I will wait for the market to cool down and then buy it.

4 Likes
14

It appears to be a situation wheras all of this “new” information has added clarity on the TAM of the business & as well as the outloook has signifcantly reduced the chance of a surprise going forward.

It’s basically investors just got the “all clear” and full steam ahead for FY2025. So while the price has increased, the level of uncertainty has dramatically reduced.

Most other businesses chose to not provide clarity just yet for FY2025 - makes its more challenging for some to own these companies ahead of earnings.

14 Likes