The stock market began 2022 on the back foot amid concerns about high inflation and rising interest rates. Those worries haven't subsided just yet, and a recent attempt by the market to stage a recovery was met by further selling pressure from investors. As it stands, the Nasdaq-100 technology index sits firmly inside bear-market territory with a year-to-date loss of 26%.
Higher inflation and interest rates have squeezed consumers' spending power and pressured the growth of the corporate sector, leading to a broad slowdown in the economy. But one cybersecurity company driven by artificial intelligence (AI) is bucking the trend in a big way.
SentinelOne (S +3.85%) just released its financial results for the second quarter of fiscal 2023 (ended July 31), and they show a 124% increase in revenue. Businesses continue to flock to the company's advanced cybersecurity products, and these aren't the only reasons the stock is a buy.
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The SentinelOne difference
Cybersecurity is a rapidly growing industry, mostly out of necessity. As more companies move their operations online using cloud technology, the threat landscape has broadened significantly, which calls for more-advanced protection. A recent survey conducted by Wall Street investment bank Morgan Stanley found that even in the face of a recession, large organizations would be unlikely to cut back on their cybersecurity spending.
That presents an opportunity for a company like SentinelOne, which doesn't just sell run-of-the-mill cybersecurity technology. Its portfolio of products is powered by advanced artificial intelligence (AI) and machine learning to rapidly speed up response times and remove the need for human intervention to neutralize threats. It's a fully autonomous solution.
The company also offers innovative, proactive tools like Hologram, which, as the name suggests, acts as a decoy inside its customers' network to entice threats to reveal themselves. It's next-level threat detection.
SentinelOne has another point of difference: It provides full visibility across the entire network on one dashboard from the endpoint. Its flagship platform, Singularity XDR, allows teams to collaborate on a single screen, which minimizes miscommunications, unclutters workflows, and speeds up incident response. Products under the Singularity banner include cloud security, identity security, and even mobile security, to name a few.
These benefits are resonating with the corporate sector. In the second quarter, SentinelOne grew its customer base by 60% year over year to more than 8,600 businesses. And remarkably, the number of customers spending $100,000 or more each year increased by 117% to 755. It highlights the appetite for advanced security tools among the largest organizations.
SentinelOne's sales are soaring
The company generated $103 million in revenue during the second quarter, which was a 124% jump compared to the year-ago period. It also increased its guidance for the full year to $417 million at the upper end, from $407 million previously. If it reaches that target, it will be the third year in a row that it has more than doubled its annual sales.
Annual recurring revenue (ARR) also rocketed 122% to a new all-time high of $439 million. ARR is typically expected to convert to revenue eventually, so it suggests the company's incredible run of growth is likely to continue.
The downside to the SentinelOne story is that it's not profitable yet. It lost $96 million in the second quarter. But here are two things to remember: First, when a company is growing as quickly as SentinelOne, it makes complete sense to continue investing aggressively in acquiring more customers. With over $1.2 billion in cash, equivalents, and short-term investments on its balance sheet, SentinelOne can continue taking losses for the foreseeable future.
Second, the company's net retention rate just hit an all-time high of 137%. It means each existing customer spent 37% more money with the company on average in the second quarter than it did at the same time last year. Therefore, in support of the first point, every customer SentinelOne acquires grows even more valuable over time.
SentinelOne stock is a buy now
NYSE: S
Key Data Points
An estimate by industry researcher Cybersecurity Ventures suggests cybersecurity spending is set to top $1.75 trillion between 2021 and 2025, and it's only going to grow larger over time as more companies migrate online.
Assuming that SentinelOne hits the upper band of its recent guidance and delivers $417 million in revenue during fiscal 2023, it places its stock at a forward price-to-sales (P/S) ratio of 18.6. That's not cheap, but if the company continues expanding by triple-digit percentages, that P/S ratio will be cut in half as soon as fiscal 2024.
Put simply, the market has given SentinelOne a premium valuation because of its rapid growth. Wall Street agrees with the sentiment: Of the 18 analysts covering the stock, not a single one recommends selling -- 14 have assigned it the highest-possible buy rating while the remaining four are neutral.
The best way to increase the likelihood of making a gain on SentinelOne stock is to buy it with a time horizon of 5 to 10 years. The sky's the limit for this company over the long term.
