Key Points
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Samsara connects software to physical operations.
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Recurring revenue and customer growth are encouraging.
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Ultimately, AI adoption must lead to revenue, profits, and cash flow.
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There’s an easy sales pitch for software that can help organizations run their vehicles and equipment more effectively: Show clients how the product can save time or money. Samsara (NYSE: IOT) does just that, helping to bridge the gap between operational data and software.
Artificial intelligence (AI) can make these tools even more productive, but greater productivity alone doesn’t make an investment thesis. For investors looking ahead to 2027, the real question is whether Samsara can turn its potential into fundamental growth that exceeds the expectations embedded in its stock. If it can, it’s possible that this under-the-radar stock could soar, perhaps even matching the run of Palantir, a stock that skyrocketed more than 700% during the past five years. Let’s dig in and see how realistic that scenario is.
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What Samsara actually does
To understand Samsara’s business, we must follow a hypothetical example. Imagine a factory. Tens of thousands of moving parts and hundreds of workers are hard at work, focused on the task at hand. There’s one problem: A key piece of equipment is at risk of failure. Worse, this type of failure wouldn’t just cause downtime; it could also pose a health and safety risk. Samsara’s software is designed to catch these issues before they become critical. It keeps operations running smoothly, saves money, and protects key assets.
The company operates on a “land-and-expand” model. It sells its product platform once, then collects recurring revenue from clients. A key aspect of its business model is upselling — selling additional modules to existing customers to generate more revenue.
Can 2027 be Samsara’s breakout year?
As for fundamentals, they’ve taken off recently. Samsara’s revenue has increased from about $250 million in 2021 to more than $1.84 billion during the past 12 months. Free cash flow has also increased, swinging from about $150 million in cash burn in 2023 to $255 million in free cash flow during the past 12 months. What’s more, the company recently turned the corner on profitability, generating about $91 million in net income during the past year.
Although these metrics are encouraging, Samsara will need to go further in 2027 for its stock to truly take off. The company recently noted that roughly 96% of its customers with more than $100,000 in annual recurring revenue (ARR) now use at least two of its products, and 70% use three or more. If the company can increase those numbers further while expanding its existing customer base, the stock market could take notice.
Is Samsara’s valuation its final hurdle?
If one factor is holding Samsara back, it could be its valuation. On a price-to-earnings (P/E) ratio basis, its stock trades at about 290. Granted, that is very high. However, Samsara is a young company that has only recently begun producing consistent profits. Therefore, the “E” (earnings) in the equation remains very modest. Consequently, it may be better to examine Samsara’s price-to-sales (P/S) ratio instead.
IOT P/S Ratio data by YCharts.
As you can see, Samsara’s P/S ratio tells a more nuanced story. While 13.5 is high compared to much of the stock market, it’s still reasonable compared to its past readings. In fact, Samsara stock is currently trading for less than its lifetime average P/S ratio of 16.5. Nevertheless, these valuations underscore that Samsara will need to deliver more profit to lower its P/E multiple to levels that will attract more institutional interest.
Is Samsara a buy now?
Samsara is a stock worth considering for growth-oriented investors with a bullish outlook on AI’s impact on real-world operations. However, the stock still has challenges. Its margins remain thin, and it lacks a long history of consistent profitability. Therefore, the stock isn’t for every investor.
Yet improving fundamentals, led by soaring revenue and free cash flow, point to a key tailwind: Organizations are beginning to view AI tools as a recurring operating expense. That bodes well for Samsara. Investors willing to buy and hold the stock could be rewarded in the long run, perhaps as soon as 2027.
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Jake Lerch has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies and Samsara. The Motley Fool has a disclosure policy.
