SentinelOne (S -1.17%) posted its latest quarterly report on Dec. 6. For the third quarter of fiscal 2023, which ended on Oct. 31, the cybersecurity company's revenue surged 106% year over year to $115.3 million and beat analysts' estimates by $4.3 million. 

Under generally accepted accounting principles (GAAP), SentinelOne's net loss widened from $68.6 million to $98.9 million. On a non-GAAP (adjusted) basis, which excludes its stock-based compensation and other one-time expenses, its net loss widened from $39.9 million to $44.4 million, or $0.16 per share -- but still cleared the consensus forecast by $0.06. 

SentinelOne is still growing like a weed, but its stock price barely budged after that report and remains approximately 60% below its initial public offering (IPO) price. Should investors take the contrarian view and buy this out-of-favor hypergrowth stock?

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Image source: Getty Images.

What sets SentinelOne apart from its peers?

SentinelOne differentiates itself from other cybersecurity companies by automating its entire threat detection process with artificial intelligence (AI) algorithms on its Singularity extended detection and response (XDR) platform. It claims this system operates more efficiently than traditional cybersecurity platforms, which still partially rely on human analysts.

SentinelOne isn't a cloud-native cybersecurity company like CrowdStrike Holdings or Zscaler, which both completely eliminate the need for on-site appliances. Instead, it operates a hybrid mix of cloud services and on-site appliances, which enables it to continue operating normally even if a company loses its internet access.

How fast has SentinelOne been growing?

SentinelOne was founded nine years ago, and it served about 4,700 customers last April ahead of its IPO. That figure nearly doubled to 9,250 by the end of the third quarter of fiscal 2023. Within that total, 827 of its customers were generating more than $100,000 in annualized recurring revenue (ARR), which represented 99% growth from a year earlier.

As the following table illustrates, its growth in revenue, ARR, and higher-value customers have all risen rapidly over the past three years. Its dollar-based net revenue retention rate, which gauges its year-over-year growth per existing customer, has also improved and remained comfortably above 130% throughout fiscal 2023.

Metric

FY 2021

FY 2022

Q1 2023

Q2 2023

Q3 2023

Revenue growth (YOY)

100%

120%

109%

124%

106%

ARR growth (YOY)

96%

123%

110%

122%

106%

Growth in Customers with $100,000+ in ARR (YOY)

109%

137%

113%

117%

99%

Dollar-based net revenue retention rate

117%

129%

131%

137%

134%

Data source: SentinelOne. ARR = Annualized recurring revenue. FY = Fiscal year. YOY = Year over year.

SentinelOne expects its revenue to rise 91% year over year in the fourth quarter and grow 105% to 106% for the full year. Those impressive growth rates, which are much higher than CrowdStrike's or Zscaler's, make it one of the fastest-growing cybersecurity companies on the market today. Analysts expect its revenue to rise 103% this year and 64% next year.

With an enterprise value of $3 billion, SentinelOne looks surprisingly cheap at 7 times this year's sales and 4 times next year's sales. CrowdStrike and Zscaler both trade at 9 times next year's sales.

Why aren't the bulls rushing back to SentinelOne?

SentinelOne is growing a lot faster than CrowdStrike and Zscaler, but both of those companies are already profitable by non-GAAP measures. In theory, this means that CrowdStrike and Zscaler can eventually achieve GAAP profitability if they maintain their current operating margins and reduce their stock-based compensation expenses.

However, SentinelOne's non-GAAP loss widened from $101.7 million in fiscal 2021 to $178.5 million in fiscal 2022, then widened again year over year from $134.5 million to $157.2 million in the first nine months of fiscal 2023. Analysts expect it to post a net loss of $401 million for the full year. That's a lot of a red ink compared to its $210.4 million in cash and equivalents (and $490.8 million in short-term investments) at the end of the third quarter.

On the bright side, SentinelOne's non-GAAP gross margin expanded 5 percentage points to 63% in fiscal 2022, and it expects that figure to rise to 71% to 71.5% for fiscal 2023. Its non-GAAP operating margin also improved by 22 percentage points to negative 85% in fiscal 2022, and it expects that metric to climb to negative 50% to 51% for fiscal 2023.

Those improvements, which CEO Tomer Weingarten attributed to "strong unit economics" and the "scalability" of its business model during the conference call, suggest SentinelOne might achieve its long-term goal of reaching non-GAAP profitability by fiscal 2025. It also indicates the company still has pricing power in its niche market -- even as CrowdStrike, Palo Alto Networks, and other larger cybersecurity companies advance into the AI-powered threat detection market. Its low debt-to-equity ratio of 0.2 also gives it some room to raise fresh cash if its liquidity runs dry.

It's not the right time to buy SentinelOne

The bulls might applaud all those strengths in a bull market, but investors are still stuck in a bear market with rising interest rates and other macro headwinds. So for now, it makes more sense to stick with profitable cybersecurity leaders like Palo Alto instead of taking a big risk on speculative hypergrowth plays like SentinelOne.