It often pays to be patient in investing (although trying too hard to "time the market" can cost you, too).
Cybersecurity company SentinelOne (S 1.84%) has been an expensive stock (by valuation, not share price) since its IPO in the summer of 2021. The stock price rose roughly 85% in the months that followed and topped out in mid-November. Since then it has followed along with the stomach-churning pullback that many growth and technology stocks have experienced. After a stellar 2021 fourth-quarter earnings report was released on March 15, I couldn't hold off any longer and I opened a position.
As a new shareholder in SentinelOne, let me explain why now was the time to buy shares (the stock is trading right around its IPO price), and why I believe the stock is poised to perform well over the coming years.
Image source: Getty Images.
A top-notch product in a complex industry
SentinelOne is a cybersecurity platform that provides endpoint security. Its focus is to protect end-user electronic devices like desktops, laptops, and mobile devices that are entry points to enterprise networks. Its software maps out and analyzes a computer's actions in what it calls "stories," looking for things that don't belong.
Cybersecurity can be a very complex industry because innovation is so important. Hackers are constantly trying to evolve, develop new attacks, and generally stay ahead of security products. SentinelOne is the self-proclaimed first autonomous cybersecurity product, using artificial intelligence instead of human analysts to analyze and deal with threats.
The company argues that machines are more intelligent and faster than humans, and testing data could potentially support its claims. MITRE ATT&CK, a globally-accessible cybersecurity knowledge base, evaluates security products based on various threats and then scores them based on how many the product detects. In 2021 testing, SentinelOne was the only product with a 100% detection rate. While this is just one test, it underlines SentinelOne's product as a high-quality offering, something I value in a dynamic field like cybersecurity.
Rapidly improving financials
SentinelOne is in a frenzy to grow and grab market share, which has made the business very unprofitable so far. The company was burning tons of cash at the time of its IPO, which kept me out of the stock at the valuation it commanded then.
SentinelOne has made a lot of progress in the past nine months. The company recently reported fiscal 2022 fourth-quarter earnings (ending Jan. 31). Annual recurring revenue (ARR) was $67 million in fiscal 2020 (up 90% year over year), $131 million in fiscal 2021 (up 96%), and $292 million in fiscal 2022 (123% growth). At the same time, the non-GAAP operating margin went from negative 152% in Q4 fiscal 2020 to negative 107% the following year to negative 85% in fiscal 2022.
In other words, SentinelOne is growing faster and simultaneously becoming more profitable with each passing year, which is very encouraging. SentinelOne is still unprofitable, but the company has $1.6 billion in cash on the balance sheet to support its growth efforts. Investors should look for margins to continue improving while revenue keeps growing in future quarters, but it's already trending in the right direction.
Growing into its valuation
SentinelOne quickly traded to a price-to-sales ratio (P/S) of around 100 when it went public, becoming one of the most expensive stocks on the market valuation-wise. Triple-digit percentage revenue growth combined with a near halving of its share price has helped cool that valuation down.
S PS Ratio data by YCharts
Today, shares trade at a P/S of almost 44, which is still nowhere close to "cheap." But if the business can keep growing at a substantial rate, it will be reasonable fairly quickly for the long-term investor. The stock has rebounded and is trading up about 38% since the earnings release. Investors looking to buy in right now might want to consider a dollar-cost averaging strategy to build a position as it seems to be shaping up to be a volatile market in 2022.
Wrapping up
Stock for great companies rarely goes on sale. Yes, SentinelOne still has to prove itself over the coming quarters and years, but the combination of rapid growth and improving margins is cause for excitement, enough that I opened a position in the stock while it was well below its 52-week high.
Stocks with high valuations like SentinelOne need to keep operating at a high level, or investors could quickly drop the stock. However, perhaps my favorite part of SentinelOne's quarter was that large customers, defined as spending $100,000 or more on the platform, grew 137% year over year in Q4. That momentum with "needle-moving" customers gives me optimism that the business will keep growing the way it needs to and make this stock a top performer going forward.
