2023-07-24 06:43:12 ET
Summary
- SentinelOne, a cybersecurity company, has seen its stock value decrease after a poor Q1 report for its 2024 fiscal year.
- S stock has shown strong customer growth and improved margins and is well-positioned in a high-demand industry.
- The company's future success depends on its ability to maintain operational excellence and restore investor confidence following recent management errors.
Cybersecurity company SentinelOne (S) came to the public markets as a hot commodity in 2021. The stock traded hands at an eye-popping valuation, soaring past 100 times revenue at one point.
But a bear market in 2022, followed by a disastrous Q1 report to kick off SentinelOne's 2024 fiscal year, have made the stock a laggard behind its peers.
Now, investors can accumulate a proven innovator in an industry that demands innovation. I'll discuss why SentinelOne looks like a long-term winner, but there is a huge caveat that could destroy investors' hopes.
Here is what you need to know.
SentinelOne offers innovation and opportunity
SentinelOne is part of a group of next-generation cybersecurity companies that use new technologies, such as the cloud and artificial intelligence, to proactively hunt for and remediate threats. SentinelOne's Singularity is the company's platform that provides security for endpoints, cloud, identity, and data.
Cybersecurity is highly competitive, and SentinelOne often gets compared to CrowdStrike Holdings (CRWD), which could be its most direct rival.
You can see below that SentinelOne receives very favorable reviews from users. It's also been named a leader in endpoint security multiple times by third-party firms such as Gartner (IT).
Data has become an increasingly important asset for enterprises as the economy becomes increasingly digital. Unfortunately, valuable data has become a target for hackers and other malicious actors, and it's very costly for businesses when hackers breach their defenses.
According to an annual study by IBM (IBM), the average breach costs global companies an average of $4.35 million and $9.44 million for U.S. companies. This virtually ensures that cybersecurity remains a priority in corporate budgets worldwide.
SentinelOne is capturing business and has grown rapidly since its IPO. It posted triple-figure revenue growth throughout its fiscal year 2022 (calendar year 2021) and maintained solid growth against tough comps in its fiscal year 2023 (calendar year 2022).
But management fumbled the ball
The business ran smoothly until it jumped the rails in the first quarter of its 2024 fiscal year (calendar year 2023). Management announced that it had made errors calculating its recurring revenue and guided for just 38% year-over-year revenue growth in Q2 and 41% for the full year.
Frankly, I think the error stating its annual recurring revenue is a bad look for management and is inexcusable. Meanwhile, CEO Tomer Weingarten pointed to a more challenging selling environment and economy as headwinds impacting its revenue guidance. He did emphasize that their competitive position was still strong and that win rates remained consistent.
But the quarter undoubtedly left a bad taste in investors' mouths. The stock heavily sold off, taking it to a sizable discount to its competitor CrowdStrike.
Is adversity an opportunity?
The company's recent poor execution is a concern, but few businesses go without the occasional stumble or mistake. There is still a lot of evidence that SentinelOne can be an excellent investment over the long term. We've touched on the quality of its product and the high regard users hold it in.
Strong customer growth supports SentinelOne's product appeal; the company grew total customers by 43% year-over-year in fiscal year 2024 Q1, and high-spend customers grew 61%. The company's net revenue retention rate ((NRR)), which indicates how existing customers are increasing spending, is consistently above 125% . These two metrics give hope that revenue growth could accelerate again eventually.
SentinelOne isn't profitable yet, but margins have improved with revenue growth.
This puts the company on a path to profitability. Cash burn is $188 million over the past four quarters. Given SentinelOne has cash on hand of $718 million and zero debt, investors shouldn't worry about liquidity anytime soon.
What are the risks?
Of course, that assumes management's recent blunder was an exception and not the rule moving forward. Management is rightfully on watch, and they could continue fumbling, which would probably kill a long-term investment thesis. Leadership, especially in an innovation-driven business, is paramount to long-term success.
Investors should look for SentinelOne to deliver a few quarters of operating results that beat analyst estimates. That could restore confidence in SentinelOne's go-to-market execution.
SentinelOne has a great product, is well-funded, and operates in a high-demand industry with plenty of growth opportunities. When you factor in that shares trade at their lowest price since the company went public, it's a potential contrarian investment idea that could pay off big if SentinelOne proves it can maintain operating excellence.
For further details see:
SentinelOne: From Market Darling To Underdog