2023-04-21 07:20:59 ET
Summary
- SentinelOne continues to see strong growth despite global headwinds.
- The business strategy is built on providing premium customization.
- Valuation going forward, should the company maintain momentum, can be inexpensive.
Investment Thesis:
I expect SentinelOne (S) will continue to grow at a steady pace, despite the competition in the endpoint security market. It continues to try and offer segmented and different products in order to meet the needs of customer's needs, and despite these customizations being on the premium side of the endpoint security products, they continue to see strong demand.
Live Data Analytics
SentinelOne has implemented a number of key features in order to compete with the broader market, one such feature, is the Live Data Analytics platform. The platform offers unique security features for the Multi-Cloud such as AWS, it offers security for O/S such as Windows or Linux, IoT, and a range of IT and Security hosts.
" With DataSet , our engineering, infrastructure and security teams have one single source of truth to make data-driven decisions. We no longer have to stitch context across teams and use cases," said Joshua Danielson, Chief Information Security Officer at Copart. "DataSet enables us to act based on data, reduce time to detect and resolve anomalies, and maintain security posture."
The ability to manage large sets of data at scale, and integrate the data with security offers a unique security apparatus for companies, as companies look to improve synergy across security, IT, and DevOps. As processes have become more complicated an increasing amount of integration is now needed in order to manage security incidences and improve detection, while at the same time, ensuring compliance, multi-cloud monitoring, and network insight in order to maximize effectiveness.
SentinelOne is responding to these needs by offering unique and customized features for its customers. In return, the customization is being offered at a higher price than CrowdStrike. CrowdStrike has been offering a large range of unique features as well albeit at a lower price. So it remains to be seen, which product the market reacts to. Going into 2023, it might be SentinelOne sees slower growth, as customization takes a back seat vs. more generic products. Strong ARR in 2022. This is likely to continue as it picks up marginal customers, and while management remains upbeat about picking up customers in 2023, I believe a slowdown is likely to occur as the company continues to struggle with a global economy, where IT spend on customized endpoint security products, and at least temporarily focusses on more general endpoint security, which is likely to benefit the likes of CrowdStrike.
Regardless, SentinelOne has a very strong product portfolio, which might just overcome issues related to a slowing economy. The company's focus on premium enterprise-grade endpoint security, which it also offers on top of the already mentioned features, such as full-stack analytics, allowing for enterprise-grade end-to-end encryption, combined with features that at the same time allow DevOps to access real-time dashboards for improved monitoring and collaboration has been a key feature should allow for SentinelOne to continue its strong run of form. This as customers try and focus on improved synergy for cost-saving in their security operations.
Comparing SentinelOne to its Main Competitor
While CrowdStrike offers a wide range of integration and services at low prices, SentinelOne's more customized high-end model is aimed at slightly different customers. It remains to be seen whether the company will be able to maintain its customer base outside of the US as it looks to expand outside North American shores. CrowdStrike and SentinelOne's business model is increasingly targeting small and medium-sized businesses, for marginal growth, although, it should be noted that the company has done well to increase larger customers as well, as stated during the earnings call recently.
CEO - "Q4 was one of our strongest quarters of win rates and new customer additions, including enterprises with ARR of over $1 million. We added nearly 750 new customers in the quarter, and our total customer count grew about 50% year over year, exceeding 10,000" "Keep in mind, this is dramatically understated as we don't count the customer service by our MSSP partners. Our customers with ARR over $100,000 grew 74% year over year."
It will be interesting to see if this momentum can continue into 2023, especially if IT spending pulls back. One of the positives from continually bringing in larger enterprise-grade customers is that SentinelOne could see margin expansions as economies of scale help the company improve monetization. This could lead to both gross margins and operating margins witnessing strong expansion. Currently, the gross margin stands at around 65%, which could head higher to potentially 67-68%, should the current rate of large-scale enterprise accounts continue to come in. Operating margins largely due to SentinelOne's focus on expansion have constantly been negative, and until management feels that it needs to do a better job of balancing both its expansion spending and profitability, the company is unlikely to be profitable.
How Are Financials Shaping Up?
Revenue continues to grow at a rapid pace for the company and the current model is unlikely to change anytime soon. During the recent quarter, a significant amount of cash was used in investing activities, and cash at the end of the period fell to $202 million. Considering the cash burn, the company clearly will have to find a way to raise cash in the coming quarters, as they look to continue to grow.
Therefore, a number of risks remain for the company. The most obvious one is that cash burn remains high and dilution or debt raise might be on the cards. Furthermore, with the current cash burn management is betting on a high rate of growth to continue, which may not happen. While revenue doubled to $422 million for the fiscal year, it remains to be seen where revenue will come from in the current fiscal year. If management remains aggressive it could lead to growth remaining around the current levels. The pure endpoint security market is expected to be around $17.4 billion by 2030, which is a positive.
Should the company continue to grow at the current pace, it would mean the valuation would fall to quite reasonable levels in 2023, around a forward price-to-sales of around 5, if the current rate of growth continues. If growth slows to the lower end, then the forward P/S would be around 7x. Regardless, SentinelOne is not priced at a premium considering growth prospects, and the strategy that the company has taken.
The continued growth rests upon a number of assumptions, firstly the overall, addressable market , and second is the endpoint security market growth. This market still has plenty of room for the company to pickup revenue, as customers look to choose between a plethora of different security providers, but mainly either CrowdStrike or SentinelOne for specific endpoint security customization.
I expect 2023 to be an exciting year, even though questions remain about strategy and execution. It remains to be seen whether in a slowing global environment, SentinelOne's strategy to provide a premium custom product holds up. If it does the stock could be heading up 20-30% in the current year, as my assumption for growth considering the overall market stand at around 30% over the next five years. As a result, if P/S were to fall to around 7, which is quite likely, that level of price growth is quite likely.
SentinelOne remains one of the two main competitors in the market and 2023 should be an interesting year with multiple headwinds and tailwinds.
For further details see:
SentinelOne's Business In Slowing Global Economy