Second Place in the Telematics Race?: PowerFleet $AIOT

How many memes can you fit into a single stock? PowerFleet’s ticker symbol is AIOT, which is a portmanteau of Artificial Intelligence (AI) and the Internet of Things (IOT). Wait, did I just use portmanteau in a sentence? How many years of my life did I waste becoming overeducated?

Also among my numerous flaws is not listening often enough to my former student, Mitch, who told me about AIOT before their last earnings call, where the stock price surged 40%. Fortunately this recent market gully has brought the price back down just a smidge to where it peaked last November.

AIOT is a logistics software and telematics business, they can help to manage fuel levels, keep track of maintenance schedules, monitor security cameras for the safety, and otherwise help manage the resources of the logistics business. Those autonomous drone delivery trucks, forklifts, and automobiles are rapidly becoming a part of the Internet of Things and augmented by Artificial Intelligence, of course. Will AI add value or will it just cause multiples to go up in a temporary euphoria? Nobody knows yet, but PowerFleet changed their symbol from PWFL to AIOT on July 1st 2024 just in case. I can’t fault a company for rebranding in the moment.

Aside from changing their ticker symbol, they changed their fiscal year three quarters ago, which makes calculating trailing twelve month figures a bit cumbersome. This might provide a catalyst for next quarter’s earnings, as it will be the first quarter with a full twelve months under the new accounting system. AIOT has been on quite a rollup, acquiring MixTelematics at the end of 2023, and Fleet Complete at the end of 2024, and three other companies since going public in 2009. While I love a good rollup, it’s not easy to keep track of organic growth vs. inorganic growth. Since going public in 2009, revenue has compounded at a 20% annual rate, but there were five dilutive acquisitions along the way. Revenue per share has declined at a -1.5% rate over the last 12 years. It’s the nature of tech companies to operate at loss and dilute along the way, trying to tease out dilution from operations vs acquisitions, it looks like AIOT’s organic growth rate is around 5% to 7%.

This decline in sales per share is not a dealbreaker for me, but it is a red flag, as is the very limited amount of insider buying. Due to the rise of passive investing, larger companies tend to fetch higher multiples. It is completely probable that the multiple rerating from size could offset the decline in sales per share. It is also possible that there are good cross selling opportunities from the most recent acquisitions which will drive revenue growth without dilution for the near term. The telematics market is growing, some estimates are for the size of the market to triple in the next five years due to the sudden advancement of technology, and some participants have absurd multiples. Samsara (IOT) trades at 23.40x price to sales with a $28 billion market capitalization on $1.179 billion of trailing twelve month revenue, and GAAP net income losses.

If the recent acquisition puts AIOT on a $400 million annual revenue run rate, even if AIOT turns out the be the Lyft to Samsara’s Uber, and AIOT trades at 1/4th the multiple that IOT does, that would still imply a $2.34 billion market capitalization for IOT on their $400 million annual revenue. Is it really IOT’s fault that they weren’t growing organically so quickly from 2009 to 2020 as an Internet of Things company when the technology was mostly still in development? The marketplace wasn’t ready for that technology yet, but now with parallel processing, predictive analytics for preventative maintenance is already here, and AI monitored cameras to analyze driver behavior is arriving now. Asset tracking, workflow management, and regulatory compliance have been around for a bit.

There are some reasons to be optimistic about near term cross-selling opportunities, AIOT has developed their relationship with a large North American rental company bringing the Active Revenue Per User (ARPU) up from $7 to $22 as they expand offerings and take over a deeper value chain. That’s just one relationship out of their 8,000 enterprise customers and 40,000 mid-market customers. As costs come down for implementation, insurance companies are also getting on the bandwagon, preferring to insure truck fleets that are more actively monitored.

It’s also important to remember that not every tech company is a network good. With regards to Uber, the clients want the network with the nearest driver, and the driver wants the network with the most customers. As for the rest of Silicon Valley, venture capital flooded their darlings with so much money that they bought enough customers to take the whole marketplace, often at a steep loss during the growth phase. This is a moment of time when venture capital is still nursing the hangover of the 2021 binge, the data center buildout is distracting funds away from other forms of tech, and we might see tech companies compete without Masayoshi Son choosing winners by buying the market. I will estimate AIOT’s multiples as the Lyft compared to Samsara as the Uber, but there is no guarantee that is how the market will develop across the entire world. While Samsara has been focusing on developed economies, AIOT has a current advantage in South Africa, Mexico, Brazil, and several other less developed economies. If the telematics market is going to triple by 2030, then AIOT probably won’t stay at 1.25x price to sales multiple.

With only one quarter of results after the recent merger, AIOT has an inorganic catalyst for trailing twelve month revenue to grow for the next three quarters as old comps are replaced by the merged business. Management is making an awful lot of promises about organic growth opportunities, and it is prudent to be skeptical of their organic growth prospects due to past history. But it is also possible that the recent merger really was as transformative as management says it was, or that the rapidly growing market will provide enough of a tailwind for AIOT to trade at 1/4th of IOT’s multiples. Either way, there are worse tech companies to be exposed to while the marketplace is starting to give small cap tech a second chance.

PowerFleet (AIOT) $7.38: $17.33 by the end of 2027