SentinelOne (S 2.10%) is a cybersecurity enterprise focused on cloud-based data and systems protection. Through its platform, the company provides endpoint and workload protections powered by artificial intelligence and was named a leader in endpoint protection in 2021 by Gartner (NYSE: IT).
Cyberattacks might be the preeminent threat of our time, and SentinelOne has outstanding operational metrics. The question is whether the current valuation warrants a buy rating for the stock.
Image source: Getty Images.
The cyberthreat
Cyberattacks are among the most dangerous and costly threats enterprises currently face. Hackers, malware, and ransomware are targeting everything from governments to small businesses. President Joe Biden held a summit this August where he made clear that the threat is real, massive, and will be getting priority treatment from the U.S. government.
Companies are well aware of the danger. They want to beef up their security and are willing to spend to do it. Because of this, SentinelOne has a total addressable market projected to be over $40 billion by 2024. It is no wonder investors were so eager to purchase shares of SentinelOne after its IPO.
An enthusiastic valuation
SentinelOne went public on June 29, 2021, at an IPO price of $35. Over the next couple of months, the stock price rocketed to well over $70. Investors likely were seeing dollar signs after other highly successful cybersecurity IPOs in recent years, with close competitor CrowdStrike (CRWD 2.30%) being a terrific example. Unfortunately, these gains were based much more on momentum and hype than fundamentals.
While it was trading over $70 per share, SentinelOne stock was sporting a price-to-sales (P/S) ratio of well over 70, as shown below.
This valuation is unsustainable even for a company growing as fast as SentinelOne. The stock has now come down in price significantly and is approaching a reasonable range.
The company has stellar metrics
SentinelOne is growing revenue at a prolific clip. The company posted $139 million in top-line sales in the nine months ended Oct. 31. This comes to a growth of over 120% over the same period in 2020. SentinelOne expects around $200 million in total revenue for the entire current fiscal year, a 115% increase over the prior year. Reported annual recurring revenue is even better, coming in at $237 million as of the last report and growing rapidly, as shown below.
Source: SentinelOne.
Analysts estimate the upcoming fiscal 2023 revenue of about $345 million. This would drop the P/S ratio to a more palatable (but still inflated) 37, based on the current $12.8 billion market cap.
The revenue growth comes from two sources: Existing customers are spending more, and many new customers are coming to the platform. The net retention rate of 130% is evidence of the tremendous job SentinelOne has done upselling its current customers. Six hundred new customers were also added in the third quarter, pushing the total count to over 6,000. Large customers, which provide over $100,000 in annual recurring revenue, grew and now stand at 416.
It is crucial that this growth continues as the company is investing heavily in sales and marketing. In the third quarter alone, SentinelOne spent over $41 million, or 74% of total revenue, on sales and marketing expenses. If that spending is yielding new customers efficiently, it will pay off handily in future periods.
It is not a buy just yet
SentinelOne stock was an exceedingly successful IPO for a time, but the stock price has dropped from its highs. The company has a very bright future and is posting terrific metrics. Insiders believe so as well, with one director recently buying 30,000 shares on the open market at an average price of just over $48 per share.
There are many reasons for insiders to sell a stock, such as paying taxes, making other investments, or diversifying. But insiders typically buy stock for only two reasons: They believe it is a quality investment at the current price, or they are trying to instill confidence during a downturn in the share price.
Still, investors should be cautious given the valuation and macroeconomic conditions. SentinelOne has likely not reached a short-term bottom just yet. This stock would be best kept on a watch list for now.
