SentinelOne, Inc (S) is a cybersecurity company that focuses on automation- and artificial intelligence (AI)-powered threat prevention, detection, and response capabilities.
SentinelOne went public in an IPO on June 30, 2021 and was founded 2013. I am neutral on the stock at the current valuation. (See SentinelOne stock charts on TipRanks)
Cybersecurity: Largest Threat of our Time
Cybersecurity is perhaps the greatest current threat facing companies, government agencies, and other enterprises. Cyberattacks have targeted hospitals, schools, government agencies and public and private companies alike.
President Biden recently hosted a summit with some of the cybersecurity leaders at the White House. The President has also stated, “I think it’s more than likely we’re going to end up, if we end up in a war – a real shooting war with a major power – it’s going to be as a consequence of a cyber breach of great consequence…” This describes in no uncertain terms that cybersecurity will be a priority moving forward.
The costs of cyberattacks, such as ransomware and breaches, are tremendous and increasing rapidly each year. It is not only the direct costs of the attacks, such as the ransom, but also the costs to restore systems, reputational hits, required disclosures, and others. It is against this backdrop that the total addressable market (TAM) for cybersecurity companies like SentinelOne is rapidly growing. As with most items in business, it is much better to invest in prevention than in correction.
SentinelOne Earnings
As SentinelOne just recently became a public corporation, the company has released its first earnings as a public company on September 8, 2021. The company reported over $45.8M in revenue for the three months ended July 31, 2021 (Q2 of fiscal 2022). This is an increase of over 121% from the same period in 2020.
For the fiscal 2022 year, which ends January 31st, 2022, the company is estimated to reach approximately $189M in revenues. The company is not expected to be profitable and will likely not produce positive net income for several years. However, the company currently has no long-term debt on the balance sheet and over $1.6B in cash and equivalents. As a result, this provides much flexibility to perform acquisitions and invest heavily in sales and marketing and research and development.
Key metrics for growth stage cybersecurity companies are focused on customer acquisition. There is a race to acquire customers, which will provide annual recurring revenue (ARR) for years to come.
For Q2 fiscal 2022 SentinelOne reported over 5,400 total customers, which is an increase of over 75% in one year. Likewise, the company also increased their large customer base over 140% to 348. A large customer is one which provides over $100,000 in annual recurring revenue. For context, CrowdStrike (CRWD) reported 13,080 customers for the same period and $315.8M in subscription revenue for the same quarter.
SentinelOne Valuation
SentinelOne stock currently has a market capitalization north of $16 billion. Based on the 2022 sales estimates, the company has a forward price-to-sales ratio of over 85x. This is extraordinarily high, even for a growing tech company.
In comparison, CrowdStrike currently has a ratio just over 40x. This is exacerbated further because CRWD has a gross margin over 75% and SentinelOne’s gross margin is under 65%.
SentinelOne is also approaching the company’s lockup expiration. On September 28th, 2021 certain stocks and stock options held by insiders will be eligible to be sold on the open market. This will likely create an increased supply of shares for sale and could cause the stock price to drop as a result. For investors, it may be wise to monitor the stock and consider opening a position if the stock price drops significantly.
Analysts Optimistic
Analysts are overwhelmingly bullish on SentinelOne stock. 11 of the 13 analysts reported by TipRanks have a Buy rating on the stock, with two Hold ratings.
The average SentinelOne price target is $71.69. This implies more than 15% upside from the stock’s September 15, 2021 closing price of $62.10.
Summary on SentinelOne
In summary, SentinelOne has become a player to watch in the cybersecurity sector. The company is growing and reputable, and has a large cash balance with no long-term debt.
However, there are valuation concerns. Should management continue to execute a high-growth strategy successfully, the stock could provide substantial returns for long-term investors. Investors should be prepared to initiate a position when the valuation becomes more desirable.
Disclosure: At the time of publication, Bradley Guichard held a long position in CRWD and may initiate a long position in S within 72 hours.
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