Samsara's strong growth and improving profitability are offset by high valuation and dilution risks.

Stock number two, Samsara. Their ticker symbol is IOT. This comparison is fun. Palantir organizes the data inside computers. Samsara does the same thing, but in the real world.

They track fleets of trucks, warehouses, heavy machinery, and all the equipment that actually moves and builds things. All that information feeds into their system, and the system tells the company how to operate better.

Fewer breakdowns, fewer wasted miles, and safer drivers.

First, a huge, untouched market. Samsara sells software and hardware for connected operations for fleets and all that stuff, and it's completely untouched right now. Second, strong revenue and income growth.

Recurring. 30% year-over-year revenue growth, and roughly 33% annualized growth over three years. And guess what? The intensive subscription model can create the potential for predictable cumulative financial growth.

Now I'll move on to point four. High customer value and significant scalability. Once a customer integrates Samsara into their fleet operations, safety operations, and compliant workflows, change can be disruptive and costly. That's tremendous value for this company.

But of course, folks, with all the strengths, there are weaknesses. Let's look at them. Very high valuation. 12.5x sales. 76x forward earnings. That's a lot. That's way too much.

Profitability is still relatively immature. Net income for the last 12 months is around 91 million, and free cash flow is around 255 million. Yet, the return on invested capital is only 0.9%, and the five-year average return is negative. That's a problem.

And folks, point four, equity dilution and equity-based compensation risks. I can't stress enough how problematic this is for companies, especially startups. Because, you guys, when you're a startup and you want to raise money, you do it in one of two ways: either by issuing equity or by issuing debt.

One of the two. Or you use the cash flow, of course, but ultimately, these companies want to grow faster, and they probably can't grow with $200 million a year of free cash flow.

So, let's look at the other data for Samsara. First, it's a $23 billion company with a roughly similar enterprise value. So, basically, their debt, balance sheet, and cash are roughly equal.

We saw that their free cash flow is $255 million versus $91 million, which is pretty cool. We saw their return on equity. Things are improving, and even though their 5-year performance is negative, it's improving a lot, which is what we like.

So, if you look at their operating income, that's what we rely on to see return on equity. I'm focusing on operating income. It just turned positive this year. It was negative all the time.

That's why when you see a negative return on equity, it shows that the operating income is negative.

So Tim asked me, "What does this mean for the business?" "Okay, guys, if the improvement continues, and the operating income continues to improve, then the return on capital will continue to grow.

That's a great sign, especially when you see such a high gross margin.

What's their gross margin? Not as high as GitLab's, but 76% is still very good. It's better than Microsoft. So, that will allow them to continue building that return on capital and continue building cash flow.

Okay, let's look at our eight pillars. I imagine this is going to be bad too. Yes, it's actually worse than GitLab. The only three signs are cash flow, net income, and revenue.

They do have higher debt, but that's because their free cash flow is so low because we based it on the five-year average free cash flow, not last year. Once this stabilizes, there will be a checkmark here very soon.

Okay, let's pull the analyst estimates. We have 71 cents for next January to reach $1.14 over the next two years, and we have revenue growth of..." 25%, 20%, 18.5%, and 25%. So, there's decent growth here, better than GitLab's.

That's something to keep in mind as we use our stock analysis tool. So, let's jump right into our stock analysis tool. Let's make our assumptions for revenue growth over the next 10 years.

I'm going to choose 12.5%, 20%, and 27.5% as revenue growth rates for the next 10 years.

Guys, there's a wide range here. A very wide range. Now, profit margin. Okay, remember, we're focusing on free cash flow. Free cash flow is higher. So, I'm going to choose 20%, 27.5%, and 35%.

Now, remember, I'm making an estimate here. I don't see it in their data anywhere, but I sit and say, "Well, if they achieved 13.8% last year, then 20% for the next 10 years doesn't seem too high."

"Maybe I'll say, you know what? I'll lower this a bit. I'll go for 17.5, 25, and 32.5.

Next, what P/E ratio would I put for this company? Well, the return on capital is improving. That's going to be 10 years from now, so hopefully by then the return on capital will be much higher.

I'll put 16, 20, and 24. Because it's an above-average company, as I can see from the significant improvement in the return on capital over the last few years.

And of course, the required return of 9.5%. I hit the Analyze button. Okay, guys, I have Low price 17, high price 133, and average price 50, not including dilution. But, if my average assumptions hold true, I can see a return of around 13% if they keep their outstanding shares as they are.

The key factor here in this business, folks, is dilution. If they can stop diluting shareholder stakes, it will be very beneficial for the company.