The attention garnered by initial public offerings (IPOs) and the rising demand for cybersecurity came together in the recent IPO of SentinelOne (NYSE:S). The company went public on June 30 at an IPO price of $35 per share, and trades around $52 at the time of this writing.
SentinelOne operates in a rapidly expanding industry. Research firm Gartner estimates worldwide spending on IT security and risk management will hit $150.4 billion this year, up from $133.8 billion in 2020. The size and strong growth of the industry has led to a bevy of publicly traded cybersecurity companies. There's no shortage for an investor to choose from.
But does SentinelOne stand out as a solid long-term investment? Or should you skip this latest entrant in the crowded cybersecurity field?
Strong growth abounds
Cybersecurity industry growth is a given in the current climate. High-profile cyberattacks are happening with greater frequency, including the Colonial Pipeline hack and a purported state-sponsored attack on Microsoft. The stakes are so high that the World Economic Forum listed cyberattacks as one of 2021's top global threats.
In this environment, SentinelOne is experiencing strong growth. The company's 2021 fiscal year, which ended Jan. 31, saw revenue double year over year to $93.1 million from $46.5 million in 2020. This growth carried into its 2022 fiscal first quarter, ended April 30. Revenue more than doubled to $37.4 million from $18 million the year prior.
The company generates revenue from subscriptions to its cybersecurity services, so a key performance metric is annualized recurring revenue (ARR). This measures the annual revenue run rate generated from subscription customers. SentinelOne has successfully grown ARR over time.
The company's ability to acquire customers fueled its ARR growth. It ended the first quarter with more than 4,700 customers, up from about 2,700 in the prior-year period.
Other factors to consider
While revenue and customer growth have been strong, SentinelOne's financials are not perfect. Its fiscal first-quarter net loss was $62.6 million compared to $26.6 million last year. It's common for tech companies to sacrifice profitability to fuel growth, so it's not a huge surprise that this company operates at a loss.
Its gross margin dropped notably year over year, from 58% in the fiscal first quarter of last year to 51% this year. The decline was due to a rise in expenses from factors such as adding staff and increased infrastructure costs to support customer growth.
SentinelOne expects costs to decline over time as it improves operational efficiencies. One move it's making in this effort is the acquisition of Scalyr, which should help the company advance its data ingestion and other technical capabilities.
The balance sheet is solid, with total assets of $520.6 million, most of it in cash and equivalents of $395.5 million, overshadowing total liabilities of $220 million.
Revenue is likely to continue rising as well, since cybersecurity is a must-have for nearly every organization today. The company has overall industry expansion as a tailwind, and it has growth opportunities internationally: Its international revenue represented only about 30% of its first-quarter total income.
The final verdict
The key question around SentinelOne's long-term prospects is how it will fare in a crowded field. The company claims its Singularity platform's proprietary technology can sniff out threats with greater accuracy and speed than competitors, such as McAfee and CrowdStrike Holdings.
Independent testing by SE Labs revealed the platform accurately stopped 100% of the cyber threats thrown at it. That's the kind of result that attracts customers to a cybersecurity solution.
Its strong product, combined with the large size of the cybersecurity industry, enables SentinelOne to capture its share of the market. The company's customer growth proves it's doing exactly that.
Given its proprietary technology, solid balance sheet, and opportunities for continued ARR growth, SentinelOne is poised to see further success over the next several years as cybersecurity demand continues to expand. I think these factors make a strong case for SentinelOne as a buy.