Cybersecurity company SentinelOne (S 2.48%) went public late last year at one of the highest valuations on Wall Street. Stocks with premium valuations better have the goods to support their price tag, especially in a bear market when investors are less forgiving.
SentinelOne recently reported earnings for the second quarter of its 2023 fiscal year, ending July 31, 2022. Here are three reasons why the company could represent a bargain after its latest business results.
1. Rapid top-line growth continues
SentinelOne is in a solidly growing sector. Cybersecurity has become a must-have for many enterprises because of how much damage a breach can cause. IBM estimated the average breach cost $4.35 million in 2022. There are more than 174,000 businesses that employ at least 100 people in the United States alone, a huge target market for SentinelOne to grow into over time.
The company is off to a fast start, maintaining triple-digit, year-over-year revenue growth every quarter since going public. While revenue growth had slowed to only 109% last quarter, it accelerated again in the second quarter, growing 124% to $103 million -- the company's first quarter of over $100 million.
Substantial customer gains helped drive revenue growth. The company added 1,100 new customers since the previous quarter, and the current total of 8,600 is 60% more than last year. SentinelOne has shown the ability to grow large accounts; the company's list of clients spending at least $100,000 grew 117% year over year to 755 as of quarter-end. Management announced that it had also recently secured its largest contract to date, a multinational industrial company.
2. Product becoming increasingly sticky
It's great when a company can acquire new customers, but getting your customer base to spend more on your product over time can also help greatly. Many software companies measure this with the net revenue retention rate (NRR); anything over 100% means your customers spend more over time.
SentinelOne's NRR reached an all-time high in Q2, hitting 137%, up from 131% the prior quarter. Management saw success in cross-selling products to its customers, noting that its top three fastest-growing products in the quarter were Singularity Cloud, Data Retention, and Ranger. These products secure cloud workloads, retain system data to help diagnose breaches, and track all of the connections on an enterprise network.
Earlier this year, the company acquired Attivo Networks, an identity security company, which could help further boost revenue expansion as SentinelOne cross-sells to its existing customer base. SentinelOne's product can become harder to rip out as it penetrates more aspects of a company's systems and operations.
3. Improving financials
Growth is excellent, but not if a company can never make money. SentinelOne is very unprofitable right now, both from the bottom line and cash standpoint. However, the company's operating margins have steadily improved over time, which was again the case in Q2.
Non-GAAP operating margin was negative 57%, improving from negative 98% a year ago. The company's non-GAAP gross margin is 72%, but it's losing money because SentinelOne is throwing every dollar it can at driving growth.
The company's operating activities burned through $111 million over the past six months, but investors don't have to overly worry about the company's losses right now. There is still approximately $1.2 billion in cash and short-term investments against zero long-term debt. That's plenty of money to fund the company's ongoing growth efforts. What's important is to ensure operating margins keep improving in future quarters.
Could the stock be a bargain?
SentinelOne's stock remains among the more expensive on Wall Street, though far removed from the heights of when it first IPO'ed. The stock's valuation exceeded a price-to-sales ratio of 100 at one point but has fallen back to Earth and is now at 23.
Investors could argue that the stock is cheap at this valuation because of the company's rapid growth. Management is guiding full-year revenue of $415 million to $417 million. Based on that amount, the stock trades at a multiple of less than 17.
The company just turned in 124% growth in Q2, so even if growth slows, it's hard to see it dropping off the face of the Earth right now. A long-term investor could see SentinelOne grow into its current valuation over the next few years (and then some) if its growth holds up reasonably well.
SentinelOne's valuation was hard to swallow during a euphoric market, but the negativity on Wall Street has created an excellent opportunity here.