2023-03-13 05:23:45 ET
Summary
- SentinelOne is set to report its fiscal Q4 2023 results on Tuesday after the close. Here's what investors should think about.
- The single most important rule of investing is to preserve one's hard-earned capital. It's not to buy distressed stocks hoping for a quick bounce.
- I maintain, as I've done now for a year, that this stock isn't worthwhile deploying one's hard-earned capital.
Investment Thesis
SentinelOne ( S ) is about to report its fiscal Q4 2023 and guidance for fiscal 2024 on Tuesday, after hours. In the interest of disclosure, it's worthwhile noting that I've been openly bearish on this stock for a year.
So, we could either say that I'm biased since I've been calling this stock a sell since it was $31 per share. Or it could be that I've been calling right so I could be directionally right again.
Incidentally, it's important to recognize that stocks don't go down or up in a straight line.
Consequently, in the short term, anything can happen, and the stock could bounce higher. But over the medium term, I remain bearish on its prospects. Here's why.
Analysts Are Fawning Over the Company
As you can see above, with the passage of time, analysts have been upwards revising their financial targets for SentinelOne.
However, we know from both CrowdStrike's ( CRWD ) and Zscaler's ( ZS ) recent results that the macro outlook has dimmed of late. Both of these leading cybersecurity companies have discussed that they are seeing ample evidence that demand for cybersecurity is here, but that the sales cycle is lengthening.
This means that customers want the product, but they are more cost-sensitive and value-seeking in which cybersecurity platform makes the most sense to them. Basically, customers want clear and high ROIs on their purchases.
The one outlier in the cyber sector has been Palo Alto Networks ( PANW ), which is a stock that I've been recommending to paid members. But aside from this one winner, the rest of the peer group is struggling.
And to be absolutely clear, I have little doubt over SentinelOne's ability to reach $125 million of revenues in fiscal Q4 2023. The problem here is that I believe SentinelOne's guidance for fiscal 2024 will struggle to be much higher the $655 million, which is largely in line with analysts' expectations.
Put another way, there's significant caution in the sector, and investors will need to be blown away by SentinelOne's guidance, to entice them to chase this stock. Or, to put it more simply, investors are unlikely to find much value in the stock.
Lack of Profits Weighs on the Stock
Nobody likes to read that the stock they own is not worthy of investing in. Even myself, being a professional investor, had to train myself to welcome a contra argument.
Or perhaps, I should say, hard lessons have provided me with the experience to welcome a contra argument.
So, let me get to it. Even if SentinelOne guides that for the year ahead its non-GAAP operating margins are likely to reach negative 20%, that still does not reflect a viable business model.
Now, to be clear, not everything is bearish. Indeed, one significant positive consideration for investors is that SentinelOne's financial position holds approximately $1.2 billion of cash and equivalents.
Consequently, perhaps for the year ahead, SentinelOne's free cash flows point to negative $130 million, which is roughly in line with my estimated negative 20% non-GAAP operating margins I presumed previously. Is this such a compelling investment?
How to Value S?
Recall, SentinelOne went public in 2021. Back in 2021, investors were still willing to entertain the idea that valuing companies on a P/Sales multiple made sense. But that approach to investing has dramatically fallen out of favor with investors.
What investors want today is to buy into fallen angels in the tech sector that have a clear path to profitability in the next twelve months. And at this moment, SentinelOne isn't able to provide this outlook for investors.
The Bottom Line
As I look around the market, in general, I would say that the bear market found its floor back in October.
And the tech-heavy Nasdaq ( COMP.IND ) hit a hard floor at the end of December. Meaning that since the start of 2023, investors have been sieving through and picking up the most undervalued names.
And amidst this action, investors have decidedly shunned SentinelOne, as the stock presently trades near its all-time lows.
In conclusion, I maintain that SentinelOne is not worth chasing with one's hard-earned capital. Whatever you decide, good luck here.
For further details see:
SentinelOne Q4 Preview: Why I'm Still Bearish