3 Reasons to Grab SentinelOne's Stock Before the Next Tech Bull Market Begins

If this were a bull market, enterprise security platform SentinelOne (S 1.84%) would likely be one of the best-performing stocks in the market. Unfortunately, although the company is rapidly growing revenue, it is unprofitable -- which is bad news in a rising interest rate environment. As a result, this stock has been on a downhill slide. The question arises, is this the right time to buy the stock?

Here are three reasons to grab SentinelOne's stock before the next tech bull market begins.

1. The demand environment for security platforms is robust

One significant effect of the pandemic is it reshaped how people work. Shelter-in-place initiatives ignited an increase in remote work and a more extensive reliance on mobile devices and Internet-of-Things sensors. Even since governments have lifted shelter-in-place orders, a shift toward remote work remains.

Unfortunately for the business world, hackers, ransomware gangs, and other bad actors have found a lucrative new area to attack: mobile devices. According to International Business Machines' Cost Of Data Breach 2021 report, "The average cost was $1.07 million higher in breaches where remote work was a factor in causing the breach, compared to those where remote work was not a factor."

Thus, cybersecurity has become a top priority for enterprise spending, as the consequences of being breached are too high. Consequently, even in an environment where enterprises are cutting back on information technology budgets, SentinelOne grew its fiscal 2023 second quarter customer count by 15% sequentially and 60% year over year to 8,600. 

The company gauges market penetration and strategic demand for its product by measuring its number of customers with annual recurring revenue over $100,000. This metric grew 117% year over year to 755, much faster than its total customer count -- indicating robust demand from its target customers.

2. The company has excellent fundamentals

High customer demand for effective cybersecurity is fueling rapid revenue growth. Its Q2 revenue grew 124% year over year to $102.5 million. More importantly, that revenue growth comes with significant margin expansion, which management attributes to solid unit economics and a scalable business model. Unit economics measures the relationship between lifetime revenue generated by a customer and the cost of acquiring that customer. A scalable business model generally means that as company revenue grows, unit economics improve and margins expand.

You can see evidence of its margin expansion on the following chart, which shows that although the operating loss rose year over year, the operating margin is increasing. Investors want the operating margin to continue to trend higher because once the margin turns positive, the company will show an operating profit. Conversely, should the operating margin trend down, it could indicate a problem with the company's operations.

Image source: SentinelOne. GAAP = generally accepted accounting principles.

Last, should the economy significantly worsen, SentinelOne has $1.2 billion in cash, cash equivalents, and short-term investments, with zero long-term debt. In addition, the company is burning cash at a rate of $150.4 million per year. Consequently, it has many years before it would use all that cash on the balance sheet.

3. SentinelOne looks like a younger version of CrowdStrike

SentinelOne started its business two years after CrowdStrike Holdings (CRWD -0.68%) with similar ideas about using modern technologies such as artificial intelligence (AI), cloud computing, and proprietary databases to protect against malware and data breaches. However, if you compare both companies' growth fundamentals at $100 million in revenue, SentinelOne has faster growth.

Data sources: CrowdStrike and SentinelOne.

But the most significant difference between the two stocks is that CrowdStrike came public shortly before the pandemic-induced bull market for high-growth tech companies. And SentinelOne came public shortly before a bear market caused by a rising interest rate. As a result, CrowdStrike is 372% above its initial public offering (IPO) price in this market. In contrast, SentinelOne is currently down 29% from its IPO price. In the following chart, you can see that before the bear market entirely took hold, SentinelOne's valuation was close to that of Snowflake, one of the most highly valued stocks on the market.

S PS Ratio data by YCharts

People who invest in SentinelOne are betting that its valuation is temporarily depressed by this poor economy, but will rebound to a far more elevated valuation in a bull market.

Should you buy it?

While the company is resistant to a recession, worsening economic conditions could eventually impact SentinelOne by slowing security IT spending. However, if you believe the economy will eventually rebound, now could be a great time to start snatching up a few shares.