SentinelOne (S -1.72%) went public last summer during a euphoric bull market. Wall Street's sentiment has since then shifted to the opposite end of the spectrum, and the cybersecurity company's stock price has fallen by almost 70% from its high.
Bear markets aren't fun, but they can present opportunities -- and SentinelOne could be a strong one.
Worthy of the hype
SentinelOne's artificial intelligence-driven autonomous platform detects viruses, attempted breaches, malicious files, and other security issues, and and eliminates the threats.
Cybersecurity is becoming increasingly critical to companies. Hackers continue to breach companies' systems, compromising customer information and stealing other sensitive data. A recent IBM study indicated that the average data breach costs the victimized enterprise $4.35 million. An ounce of prevention is worth a pound of cure, so cybersecurity should remain an important expense for businesses. Grand View Research expects the cybersecurity industry to grow by an average of 12% annually through 2030.
SentinelOne's platform has been attracting plenty of new clients: The company has posted at least 100% year-over-year revenue growth every quarter since its IPO, making it one of the fastest-growing companies on Wall Street.
S Revenue (Quarterly YoY Growth) data by YCharts
Shortly after its IPO, its price-to-sales ratio surpassed 100, an eye-popping valuation that made it arguably the hottest stock on the market.
Why has the air gone out of the balloon?
Of course, that was then. Now, the stock is near its lowest price since its IPO, and its price-to-sales ratio is below 24. Much of that decline can be pinned on the bear market. Investors aren't as bold when the economic outlook dims, and stocks with high valuations tend to get sold off in favor of value stocks -- mature companies with more stable but slower-growing businesses.
To make matters worse, SentinelOne is still young and isn't anywhere near profitability. You can see below that its free cash flow and net income are negative, meaning that the business is burning cash.
S Free Cash Flow data by YCharts
Not every growth company will endure this tough economic period. Shrinking share prices make it hard to raise money by issuing new shares, and debt is getting harder to access. However, SentinelOne is in the fortunate position of having a strong balance sheet. Yes, it is burning through cash, but as of April 30, it held cash, cash equivalents, and short-term investments worth $1.6 billion, and had zero debt. So while it burned through $128 million over the past year, its cash cushion would allow it to keep losing money at that rate for another decade without issues.
Is the stock a buy?
One could argue that the stock's plunge has pushed shares from eye-poppingly expensive to bargain-priced. But "bargain" is a strong word, so let's consider the details. Compare the price-to-sales ratios and revenue growth rates of SentinelOne and Crowdstrike, its closest competitor:
S PS Ratio data by YCharts
SentinelOne's valuation has fallen below that of Crowdstrike, despite its superior growth. True, Crowdstrike is generating positive free cash flow and SentinelOne isn't. However, if you're a long-term investor, that's not a big deal because SentinelOne has plenty of cash to fund its growth.
Similarly, compare the two on an enterprise-value-to-sales (EV/S) ratio basis. That metric strips a company's cash out of the equation and values it strictly on the business itself.
S EV to Revenues (Forward) data by YCharts
SentinelOne's EV/S ratio is about 31% less than Crowdstrike's. While business comparisons are never strictly apples-to-apples, these are two quite similar companies. It seems clear that Wall Street is heavily discounting SentinelOne because it's unprofitable.
Investors have to hope that SentinelOne will become profitable eventually, but no investment is risk-free. However, if you're bullish on cybersecurity over the long term, SentinelOne's rapid growth could make it a rewarding investment over time.
