Most investors likely know three things about SentinelOne (S +3.48%), the cybersecurity company that went public last June: It's growing like a weed, it's deeply unprofitable, and its stock still can't be considered a bargain after dropping nearly 30% below its IPO price of $35.
However, smart investors will also understand why SentinelOne's stock is still relatively expensive, how the company differentiates itself from the competition, and how it plans to challenge CrowdStrike's (CRWD +4.57%) cloud-native platform with an AI (artificial intelligence)-powered blend of services.
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1. It's the biggest cybersecurity IPO in history (for now)
SentinelOne raised $1.2 billion at an implied valuation of $8.9 billion in its market debut last June, which eclipsed CrowdStrike's record-setting debut of $6.7 billion two years earlier and made it the highest-valued cybersecurity IPO (initial public offering) in history.
However, CrowdStrike's initial valuation was 14 times the revenue it would generate in fiscal 2020 (which ended in January of the calendar year). SentinelOne's initial valuation was 43 times the revenue it would generate in fiscal 2022 (which ended last January).
That valuation gap didn't accurately reflect the difference between their initial growth rates: CrowdStrike's revenue rose 93% in fiscal 2020, while SentinelOne's revenue grew 120% in fiscal 2022.
Instead, it reflected the more speculative market environment in 2021, which drove investors toward frothier growth stocks, cryptocurrencies, non-fungible tokens (NFTs), special purpose acquisition companies (SPACs), and other riskier assets throughout most of the year.
Today, SentinelOne trades at just 17 times this year's sales, while CrowdStrike trades at 19 times this year's sales. SentinelOne is still growing faster than CrowdStrike, but CrowdStrike's earnings growth -- which arguably matters a lot more in this volatile market -- is much more stable.
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2. It blends the old with the new
Generally speaking, the cybersecurity market is split into two camps: traditional players that install on-site appliances, and forward-thinking ones that replace those bulky appliances with cloud-based services, which are stickier and easier to scale as an organization expands.
CrowdStrike eschews on-site appliances and only provides cloud-based services. Its more diversified competitor Palo Alto Networks provides both on-site firewall appliances through its core security platform Strata as well as cloud-based security services through its Prisma platform.
SentinelOne's approach is more similar to Palo Alto's than CrowdStrike's: It straddles both markets with a hybrid mix of on-site virtual appliances and cloud-based services. But what truly sets it apart is its usage of AI algorithms in its Singularity extended detection and response (XDR) platform.
Instead of relying on teams of human analysts SentinelOne crunches its aggregated data with automated AI algorithms. It claims that approach is faster, more efficient, and insulated from human mistakes.
3. It really wants to disrupt CrowdStrike
SentinelOne competes against a wide range of cybersecurity companies, but it specifically takes aim at CrowdStrike on its website.
SentinelOne claims CrowdStrike's "1-10-60" model -- which allocates one minute to detect a threat, 10 minutes to investigate, and 60 minutes to respond -- is "obsolete" and that "SentinelOne leverages AI -- not analyst intervention -- to act on malicious activity in real time..."
SentinelOne claims it consistently outperformed CrowdStrike in the third-party MITRE Engenuity ATT&CK Evaluations with the "most analytic detections three years running." It also says CrowdStrike's latest MITRE rankings place it "behind some legacy antivirus vendors," but CrowdStrike disputes that claim. CrowdStrike says it "had 100% prevention across the MITRE Engenuity ATT&CK Evaluations test" and notes that it provides an around-the-clock support team to address threats.
Lastly, SentinelOne claims its services are cheaper than CrowdStrike's because it customizes its platform for each organization. Those variable expenses are generally lower than CrowdStrike's flat subscription rates. CrowdStrike hasn't created a dedicated website to counter SentinelOne's bold claims yet, but it has repeatedly listed its smaller rival as one of its top endpoint security competitors in its SEC filings.
It's still a very risky investment
SentinelOne is still growing rapidly: It expects its revenue to nearly double in fiscal 2023, which ends next January. However, it remains deeply unprofitable by both generally accepted accounting principles (GAAP) and non-GAAP measures, and it spent a whopping 40% of its revenue on stock-based compensation expenses in the first quarter of 2023.
That's why I personally own shares of CrowdStrike and Palo Alto but still haven't bought a single share of SentinelOne yet. SentinelOne's growth rates are fantastic and its technology is intriguing, but it simply hasn't proven that its fledgling business is sustainable yet.
Editor's note: This article has been updated to clarify information about CrowdStrike.
