The Best 2021 Software IPO

Breaking down Samsara’s three drivers of valuation and the risks investors should understand

👋 Welcome to a paid-tier edition🔒. I am now a “Substack bestseller” (sounds cool). If you are unsure about paying then sign up for a free 7 day trial. Hopefully you either love the article or you forget about it and you keep paying me for many many years :)

---

Ultimately a company should be valued based on its ability to generate free cash flow (FCF) per share. FCF per share shows how much cash can be generated over a company’s life for each share.

While the concept of FCF/share is important, without doing a full discounted cash flow (DCF) model it is difficult to use in practice.

If we expand the concept of FCF per share by one layer, then the value of an investment is determined by three components:

1. Revenue growth

2. Profitability

3. Dilution

The main thing is to keep the main thing the main thing. — Stephen Covey

There is an overwhelming amount of metrics, acronyms, and signal that folks use to value a software business. While these might make us feel special, all that ultimately matters are a company’s revenue growth, profit potential, and dilution to existing investors. Make sure to “keep the main thing the main thing” and don’t get drowned in all the noise.

The order above is how most investors consider their relative importance - some taking more extreme views than others. But it’s important for investors to understand all three valuation drivers because each of their impacts is significant for long-term investors.

Article Outline:

• Cloud IPO Performance by Year (free)

• Samsara Q3 Earnings Report (free)

• Samsara’s Deceptive ARR (paid)

• Samsara’s Profit Potential Concerns (paid)

• Impact of High Dilution (paid)

• My Thoughts on Samsara (paid)

**Nothing here is investment advice to buy/short any stock. This is for educational purposes only. Author may hold positions in securities discussed.

Cloud IPO Performance by Year

Software IPOs in 2020 and 2021 have been absolutely terrible investments since their IPO to today. The average 2021 IPO is down 45% from the close of their first day trading. 2020 IPOs aren’t that much better at a loss of 34% since the first day of trading.

2019 and earlier IPOs look pretty good though.

In the 2021 cohort, only two cloud companies that I am tracking are above their IPO day 1 close. Samsara by far tops the list at an impressive 40% gain as of last Friday after its 26% stock price pop following their earnings announcement.

There are plenty of great businesses on these lists, but timing into an investment can make a huge impact to your returns.

Samsara Q3 Earnings Report

Samsara released Q3 earnings after the market close on Thursday (November 30th) and provided some really strong results:

• Q3 Actuals:

  • Revenue: $238M actuals vs $224M consensus (6% beat)

  • EPS: $0.04 actuals vs $0.01 consensus

  • Hit $1B in ARR and growing 39% YoY

  • Free cash flow (FCF) margin of 4%

• Q4 Guidance:

  • Revenue: $258M guidance vs $250M consensus (3% raise)

  • EPS: $0.025 guidance vs $0.02 consensus

• FY24 Guidance:

  • Revenue: $919M guidance vs $899M consensus

  • EPS: $0.055 guidance vs $0.02 consensus

The market clearly loved the results because the stock jumped up nearly 26% as a result of the earnings report.

Revenue - Samsara’s Deceptive ARR