The Revenge of Cathie Wood: PowerFleet Update $AIOT

There was no new writeup yesterday. I spent a few hours looking at name after name, and I didn’t happen across anything that didn’t have so much froth that it wouldn’t get posted on Reddit’s worst Guinness pour thread.

That isn’t to say there aren’t pockets of value out there, but I’ve written about too many restaurants, chemicals, trucking, and consumer durables companies in a row. Of course energy is still cheap, but my portfolio is already heavy with that two year pain train. One of the areas that still seems cheap to me, and where I don’t have a full allocation, is small cap tech.

I have written previously about the Revenge of Cathie Wood. Those small cap innovators had their stock prices crushed by rising interest rates, and they are ready to re-inflate. ARKK has had an incredible rally, and is already half way to reaching their 2021 highs.

But, the AI narrative has been particularly harsh to small software companies. I maintain that it is easier for established market players to implement AI than it is for a new AI startup to poach their business relationships. If I am correct, that narrative should break through the noise at some point in this frothy market. Until then, these companies are still cheap.

I have written previously about PowerFleet (AIOT), the small competitor to Samsara (IOT). Both are participants in the Internet of Things market, as it relates to logistics. I last wrote about PowerFleet on February 27th, when it had a share price of $7.38, instead of today’s $5.45. Since that time, they have had some modest 6% organic sales growth quarter over quarter, which is impressive considering the doldrums that trucking has been in during this time. My original writeup can be found here:

Especially after the recent militarization of cargo containers in the Ukraine War, it seems obvious to me that we are heading toward a world where every container will be tracked in real time by an Internet of Things layer. Now, with illegal migrant labor leaving the trucking sector, there will be a greater push for finding cost cutting measures to offset the increased labor costs of hiring truck drivers that have a legal right to work. Also, as interest rates continue to be cut globally, and new trade deals are giving certainty to the market, there should be some sort of rebound in trucking volumes within the next 18 months. All of those trends indicate that IOT and AIOT will have secular tailwinds.

PowerFleet was previously a mix of hardware and software, but management has been focusing on pivoting to software. Services revenue is up 52% year over year, and 6% quarter over quarter. While the year over year number reflects an acquisition, the quarter over quarter does not. Services revenue now comprises 83% of the revenue mix, compared to 75% one year ago. The long term goal is an 85% services revenue mix. As with all SaaS companies, the attraction is toward reaching the economies of scale where every new dollar of services revenue leads to ninety to ninety five cents of net income. And PowerFleet has reached that scale, while 6% quarter over quarter growth seems modest compared to some industries, most of that falls directly to the bottom line.

PowerFleet landed several new contracts which aren’t showing up fully in last quarter’s sales, but should drive future growth. One new contract was for the Mexican subsidiary of SIXT, a global car rental company. And AIOT just created a partnership with MTN Business, the largest mobile network with 297 million customers across Africa. The total contract value of new business won in this quarter was just about $3 million, but with all SaaS companies, the real growth story comes from upselling those new customers after they become dependent. And again, with margins after economies of scale have been reached $3 million of new contracts should pass through to around $2.7 million of net income, which is a significant quarterly win for a $727 million market capitalization company.

Based on these new contracts, management is guiding toward continued sales growth for the rest of the year, potentially organic double digit growth by Q4. While they don’t guide toward revenue specifically, they do give guidance in the context of their net debt to EBITDA target, which they believe will be less than 2.25x in three quarters. Net debt to EBITDA was 3.25x six months ago, 2.97x last quarter, and again, is guided towards 2.25x in three quarters. This should be driven by both an increase in revenue and about $30 million of debt retirement out of approximately $85 million of EBITDA.

Aside from the recently won partnerships and contracts which might drive revenue from upselling existing clients, AIOT is engaging in a sales channel overhaul. Management assures us that it is already filling their sales pipeline, but these are the sorts of management comments that it is healthiest to ignore. But whether sales improves next quarter, or over the next year or two as trucking companies digest the recent immigration enforcement, AIOT remains an interesting company, growing organically, retiring debt, and positioned in a sector which makes it capable of catching froth, if investor enthusiasm eventually finds them.

While I can’t promise that AIOT will rally from a price to sales ratio of 1.86x, to 15x like their larger competitor Samsara, it is a distinct possibility in this frothy market. Retail investors are hunting for AI companies with revenue growth, and AIOT might just give them what they want. It feels absurd to put a price target on an AI company in this kind of a market. OKLO famously is not predicting any revenue at least until 2030, and yet they trade at a market capitalization of $25 billion.

AIOT has a real product, real sales, and real demand from logistics companies to have their video data analyzed in order to predictively prevent accidents. By analyzing driver camera data, AIOT can pre-emptively reach out to drivers and alert them when their faces are showing signs of fatigue. This has led to an 80% decrease in very costly safety events.

Of course their larger competitor, Samsara, does the same thing. But where I was previously critical of PowerFleet’s role as Lyft to Samsara’s Uber in the competition over being the lynchpin in a network, I am now a little more aware of corporations desire not to be at the mercy of a monopoly. You only have to look at the recent partnerships with AMD and Broadcom to try and upset the Nvidia market position to realize that customers don’t want to be without bargaining power. This should benefit PowerFleet, as even large enterprises would be interested in throwing them a bone here and there.

And perhaps most importantly of all in this frothy market, although as a value investor it pains me to say it, the chart looks good:

PowerFleet (AIOT) $5.45: $17.33 by the end of 2027

(or much much higher if it catches the right kind of attention)