2023-11-07 11:22:25 ET
Summary
- SentinelOne, Inc. struggles with profitability amid slowing revenue growth.
- The company's rich valuation fails to align with its decelerating performance.
- Investors remain skeptical about the sustainability of SentinelOne's business model.
Investment Thesis
SentinelOne, Inc. ( S ) is a cybersecurity company that provides autonomous, AI-powered protection against a wide range of cyber threats. Their Singularity Platform enables organizations to prevent, detect, and respond to attacks in real time, offering comprehensive visibility and automated incident investigation.
This is how I'd sum up my view of SentinelOne. Investors who are getting involved with SentinelOne are doing so because they want to support a company that's seeing very rapid growth. Period.
And the reason why SentinelOne had been able to deliver such compelling growth, and in no small part, has been attributed to the fact that interest rates were at close to 0% so that it could be operated as an unprofitable enterprise, and yet still be rewarded by its shareholders with a very high multiple.
But in this more brutal higher-for-longer interest rate environment, investors are no longer rewarding profitless prosperity enterprises. In other words, investors are more compelled towards companies that have figured out a way to rapidly grow while being profitable even if their underlying profitability is much more moderate.
And that's precisely what's impacting SentinelOne. SentinelOne is having to slow down its efforts at growing as quickly as possible to take market share because they are having to figure out a way to deliver profitable growth .
Quick Recap
I've been openly bearish on SentinelOne for some time.
In fact, for a while, I was the only analyst on Seeking Alpha that was bearish on this stock. Although, admittedly, that's no longer the case now. Furthermore, to be clear, it's not that I'm bearish on cybersecurity as a whole, I think that's important to state.
I've been just as vocal that I've been recommending Palo Alto Networks ( PANW ) since 1 August 2022.
As a brief reminder, I find this table to be helpful:
- Stock down 10%>> 11% to break even
- Stock down 30%>> 43% to break even
- Stock down 45% >> 82% to break even.
It shows the geometric progression to breakeven when a stock is not working out positively. As an inflection investor, I'm working hard to compound my portfolio at a slow but steady and, above all, realistic rate. I find this table helps be more honest about what I'm seeking to accomplish for my own financial goals.
Revenue Growth Rates Are Moderating
The question that SentinelOne faces is how can they grow their revenues while being profitable?
I've alluded to this throughout already. SentinelOne was being rewarded for positively delighting its investors with a steady drop of positive news. More specifically, what their investor base had been rewarding them for had been steady and regular increases in their revenue growth rates.
But now, SentinelOne operates in a more intensely competitive market environment, where IT departments are more stringent with their budget. This implies that IT departments no longer support uncontrolled expenses.
As a corollary to this, we are seeing SentinelOne's revenue growth rates slow down dramatically. Here's the ultimate reality, when SentinelOne reports its fiscal Q3 2024 results, its revenue growth rates will be around 40% or perhaps a nudge lower.
Put another way, even as its comparables are starting to ease up, its pace of growth will be less than half of what it was in the previous 12 months.
Furthermore, I believe that SentinelOne will not meaningfully increase its outlook for fiscal Q4 2024. Consequently, when SentinelOne exits this fiscal year, its revenue growth rates will be cemented at a sub-40% CAGR.
S Stock Valuation -- Why It's More Expensive Than It Seems
When SentinelOne was growing at a back-breaking pace, any consideration toward its profitability was pushed aside. A moot point, if you will.
But now that SentinelOne will exit fiscal 2024 with less than 40% CAGR, this will naturally force investors to start to form a view on what realistic growth rates for fiscal 2025 will be.
And if it appears increasingly clear that SentinelOne is in actuality growing at sub-40% CAGR, its investor base will start to rotate away from this name as this growth crowd will move on to chase another faster-growing company.
This will leave space for a new investor base to take their place. One that supports more of a ''growth at a reasonable price'' type of business or GARP investor.
Moreover, in my opinion, SentinelOne is still too expensive to placate and attract the GARP investor.
This will leave SentinelOne's stock in no-man's land.
It will be a stock that's delivering very rapidly decelerating revenue growth rates that will not attract the ''growth-type'' investor. And not cheap enough for the GARP investor, that seeks out a business that has profitability prospects on the horizon in the next twelve months or close by.
This does not mean that the GARP investor only backs profitable stocks. Not at all. But it does mean that this sort of investor wants to see a reasonable line of sight towards profitability in the twelve months, something that I do not believe SentinelOne will be able to deliver.
The Bottom Line
SentinelOne's inability to achieve profitability amidst slowing revenue growth rates raises concerns about its long-term sustainability. Despite earlier investor enthusiasm, the company's rich valuation seems incongruent with its decelerating performance, failing to appeal to both growth-oriented and GARP investors.
With an unclear path to profitability, SentinelOne, Inc. stock appears to be in a precarious position, relying solely on its compelling narrative for future growth. As market dynamics shift, the company's challenges in sustaining investor confidence could leave it in an unfavorable position, unable to satisfy the expectations of either growth-seeking or GARP investors.
For further details see:
SentinelOne: Challenges Of Maintaining Investor Confidence