Cybersecurity company SentinelOne (S -1.72%) is one of the most expensive stocks on Wall Street. Allow me to clarify that; SentinelOne's stock carries one of the priciest valuations of any publicly-traded company.
It's been that way since the company went public in June 2021. However, investors across the broader market have ruthlessly sold off growth and technology stocks amid high inflation and interest rate fears.
But while many are running for cover, I'm here to tell you it's time to roll up your sleeves and get dirty. Yes, SentinelOne remains among the most expensive stocks on the market. Still, the rampant fear and doubt in today's market make now a great time to consider adding SentinelOne to your portfolio. Time to dive deeper.
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Not as expensive as it once was
SentinelOne is a software company that uses artificial intelligence to hunt, detect, and remove cyber threats from endpoints like computers and mobile devices. It's part of a new generation of cybersecurity companies that includes fierce rival CrowdStrike.
Artificial intelligence and cybersecurity are both hot topics among investors, which might help explain the crazed demand for the stock when SentinelOne went public last summer. The stock's valuation soared, hitting as high as a price-to-sales (P/S) ratio of 100, one of the highest of any publicly-traded company on Wall Street.
But SentinelOne, like many other growth names, is now trading near its lows. The stock's P/S ratio has slipped to 35, a tremendous decline, thanks to a lower share price and revenue growth that has helped SentinelOne "catch up to" its valuation.
SentinelOne deserves a premium
SentinelOne's decline has put it roughly on par with CrowdStrike, which currently trades at a P/S of 32. These are premium valuations in today's market, where a more established cybersecurity company like Palo Alto Networks trades at a P/S of just 12.
However, SentinelOne's strong growth and financials continue to suggest that it deserves a higher price tag. For starters, SentinelOne is growing revenue at a triple-digit pace, superior to both competitors. Although, it's fair to point out that CrowdStrike and Palo Alto are generating a billion dollars or more in yearly revenue, while SentinelOne reported $205 million over the past 12 months. Smaller numbers often grow easier than larger numbers.
S Revenue (Quarterly YoY Growth) data by YCharts
CrowdStrike and Palo Alto also generate positive free cash flow, while SentinelOne doesn't. Investors will want to see how its financials improve over time, but SentinelOne seems like it's still an early-stage company with years of rapid growth left. The company's operating margin has improved over the past three years from -152% to -107%, to -85% for the year ending Jan. 31, 2022. SentinelOne has $1.7 billion in cash and short-term assets, so I think some patience is warranted as long as margins keep improving.
S Free Cash Flow data by YCharts
Lastly, SentinelOne seems like one of the best innovators in the security sector. Its AI-powered product excels in extended detection and response (XDR) benchmark tests like the MITRE ATT&CK evaluations. Additionally, SentinelOne is investing in expanding its platform capabilities, recently acquiring identity security company Attivo Networks for $616.5 million and observability company Scalyr for $155 million.
I don't know if SentinelOne is the best cybersecurity company globally; many security companies thrive in today's digital world. However, it's safe to say that SentinelOne is among the fastest-growing ones, and in an innovation-driven industry like security, I think that deserves special consideration by investors.
If not now, then when?
Warren Buffett once said that it's better to pay a fair price for a wonderful company than a great price for a fair one. Investors might be waiting for SentinelOne to keep falling, and maybe the stock will.
But consider how much SentinelOne's stock price and P/S ratio have fallen already. Many growth stocks are 50% or more down from their highs over the past 18 months. There's a war in Ukraine, rampant inflation, and investors are scared. I'm not sure how much more bad news can come and push the stock lower. SentinelOne seems like a wonderful company, and I'm more than happy to pay the "fair" price the stock commands today.
