Last June, SentinelOne (S 3.47%) eclipsed CrowdStrike (CRWD 3.63%) as the highest-valued cybersecurity initial public offering (IPO) ever. It went public at $35 per share, and its initial valuation of $8.9 billion topped CrowdStrike's $6.7 billion market debut in 2019. Its stock started trading at $46 a share and eventually hit an all-time high of $78.53 last November.
But today, SentinelOne's stock trades right around its IPO price. Macroeconomic concerns about inflation and rising interest rates have caused investors to ignore its robust growth and fret over its frothy valuations and widening losses. Should investors still consider buying some shares of this unloved growth stock?
Image source: Getty Images.
What does SentinelOne do?
Most traditional cybersecurity companies, like Fortinet, install on-site appliances to power their firewalls and security services. Newer players like CrowdStrike are attempting to disrupt this market with cloud-native services, which don't require any on-site appliances at all.
SentinelOne straddles both those markets with a hybrid blend of on-site virtual appliances and cloud services. It claims that relying entirely on cloud services results in slower response times and requires active internet connections (which can be disrupted by cyberattacks) and that both on-site and cloud-based systems still rely too heavily on error-prone human analysts.
To cut humans out of the loop, SentinelOne processes all of its data with its AI-powered Singularity XDR (extended detection and response) platform.
How fast is SentinelOne growing?
A lot of companies are paying attention to SentinelOne's AI-powered hybrid approach. It ended the fourth quarter of fiscal 2022 with 6,700 customers, 520 of them generating annual recurring revenues (ARR) of over $100,000. It also posted an impressive dollar-based net revenue retention rate (which gauges its year-over-year growth per customer) of 129%.
SentinelOne's consistent customer growth, rising ARR, and high dollar-based net revenue retention rates have enabled it to post triple-digit revenue growth over the past year.
|
Period |
Q1 2022 |
Q2 2022 |
Q3 2022 |
Q4 2022 |
|---|---|---|---|---|
|
Customer Growth (YOY) |
74% |
75% |
75% |
70% |
|
Growth in Customers With $100,000-plus in ARR (YOY) |
127% |
140% |
140% |
137% |
|
ARR Growth (YOY) |
116% |
127% |
131% |
123% |
|
Dollar-Based Net Revenue Retention Rate |
124% |
125% |
130% |
129% |
|
Revenue Growth (YOY) |
108% |
121% |
128% |
120% |
Data source: SentinelOne. Chart by author. YOY = year over year.
A bright outlook and a premium valuation
For the full year, SentinelOne's revenue surged 120% to $204.8 million. Its adjusted gross margin also expanded from 58% to 63%.
By comparison, CrowdStrike's revenue rose 66% to $1.45 billion in fiscal 2022, while its adjusted subscription gross margin stayed flat at 79%.
In fiscal 2023, SentinelOne expects its revenue to rise 79% to 81% and its adjusted gross margin to expand to 65% to 67%. That's a bright outlook, but the stock already trades at 22 times the midpoint of its sales forecast.
That price-to-sales ratio might seem high, but CrowdStrike -- which expects its revenue to rise 47% to 49% in fiscal 2023 -- also trades at 21 times the midpoint of that guidance. So, if we're only looking at the top-line growth, SentinelOne seems like a better value than CrowdStrike.
But we can't ignore its steep losses
Unfortunately, investors can't simply gloss over SentinelOne's losses. On generally accepted accounting principles (GAAP), its operating loss more than doubled from $115.5 million in fiscal 2021 to $267.3 million in fiscal 2022. Its net loss widened from $117.6 million to $271.1 million.
On a non-GAAP basis, SentinelOne posted a negative operating margin of 85% in fiscal 2022, compared to a negative 107% in 2021. It expects to post a negative non-GAAP operating margin of 55% to 60% in fiscal 2023.
Those improvements are meaningful, but CrowdStrike's non-GAAP operating margin -- which is firmly positive -- notably doubled to 14% in fiscal 2022. CrowdStrike is also profitable on a non-GAAP basis.
SentinelOne's guidance also doesn't include its $616.5 million acquisition of Attivo Networks, which is expected to close in the second quarter. It expects the acquisition to be accretive to its gross margins, but integrating the new identity security unit will also likely squeeze its operating margins.
On the bright side, SentinelOne ended the year with $1.67 billion in cash and equivalents, and its low debt-to-equity ratio of 0.2 gives it plenty of room to raise fresh capital. Therefore, the company will probably keep bleeding red ink -- but it won't go bankrupt anytime soon.
Is it time to buy SentinelOne?
SentinelOne will likely remain out of favor in this market, which remains an inhospitable environment for unprofitable hypergrowth companies.
SentinelOne might seem like a good value if we look only at its sales, but it probably won't attract any investors until it meaningfully narrows its non-GAAP net losses. Until that happens, SentinelOne could remain below its IPO price as investors flock toward more stable cybersecurity plays like CrowdStrike, Fortinet, and Palo Alto Networks.
