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SentinelOne: Exciting Growth Story, with Risks
Stock Analysis & Ideas

SentinelOne: Exciting Growth Story, with Risks

SentinelOne (S) invented the first purpose-built AI-powered extended detection and response platform in the world to make cybersecurity defense truly autonomous from the endpoint and beyond. 

The company’s Singularity Platform doesn’t spare a second when it comes to defending against cyberattacks – performing at a faster speed, greater scale, and with increased accuracy than possible than any human or crowd.

Modern organizations have become increasingly digital and vulnerable to cyberattacks. This creates an accelerating risk cycle: more devices produce and process more data, which results in further opportunities for cybercriminals to strike. Therefore, cybersecurity is foundational to maintaining our digital way of life.

For this reason, SentialOne’s Singularity Platform, which can be used globally by organizations of all sizes across a wide range of industries, has been gaining robust traction lately. SentinelOne’s revenues for FY 2020 and FY 2021 were $46.5 million and $93.1 million, respectively, implying year-over-year growth of 100%.

While the company’s growth trajectory has certainly been impressive, investors need to be wary of its consistent losses and rather expensive valuation multiple attached to the stock.I am neutral on the stock.

Growing Revenues

SentinelOne’s Q3 2022 results marked the third consecutive quarter of triple-digit ARR growth, with the company continuing to make solid progress across all facets of its growth strategy outlined during its IPO.

Total revenue came in at $56 million, representing a 128% increase compared to $24.6 million in the comparable period last year. 

Consequently, the company’s annualized recurring revenue (ARR) grew 131% year-over-year to $237 million. SentinelOne’s growth was powered by growth in customers as well as increased spending per customer. 

Specifically, the company’s total customer count expanded by more than 75% year-over-year to over 6,000 customers, while customers with ARR over $100,000 increased 140% year-over-year to 416. 

Dollar-based net revenue retention rate also landed at a sky-high new record of 130%. These metrics speak volumes to SentinelOne’s platform capabilities based on customers’ underlying utilization, and it wouldn’t be an exaggeration to say that SentinelOne could be one of the best growth stocks for 2022 based on its current momentum.

Widening Losses

With the company reinvesting much of its gross profits back into growth, it makes sense that SentinelOne has a negative bottom line at its current phase. 

Note that gross margins came in at 64% Q3 2022, compared to 58% for the same period of fiscal 2021. Hence, gross margins are likely to keep growing faster than revenues going forward as economies of scale kick in. 

The company reported a net loss of $68.5 million during the quarter, more than double the $30.1 million in losses it reported in Q3 of last year.

While the company has a massive $1.7 billion cash position which it can utilize to sustain multiple money-losing quarters, and while net losses also include stock-based compensation ($27.3 million in Q3), which is a non-cash item, investors must be wary of the company’s profitability prospects in the short-to-medium term. 

Money-losing companies face a tough time these days, as investors demand profits during higher-risk environments.

Wall Street’s Take

Turning to Wall Street, SentinelOne has a Strong Buy consensus rating, based on 10 Buys and three Holds assigned in the past three months. At $65.92, the average SentinelOne stock prediction suggests 65.1% upside potential.

Conclusion

SentinelOne is a disruptive company that has been taking great advantage of the growing need for robust cybersecurity platforms. While SentinelOne’s growth story appears to be quite amazing, investors need to be wary of the company’s widening losses, rich stock-based compensation that diluted current shareholders, and the rather expensive valuation considering the stock is trading at 45x its ARR.

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