The stock market has cycled between periods of fear and greed throughout history. So it's very likely that a new bull market will come, even if it doesn't seem possible after what's been a tough 18-month stretch. Some of Wall Street's most popular stocks from a couple of years ago have been cast aside as if they'll never see new highs.
For some stocks, that may be true. But for the truly exceptional businesses that have continued executing through all the volatility, these are great buying opportunities for those with the patience and stomach to ride out the bumpy journey.
One stock, in particular, excites me. Cybersecurity company SentinelOne (S -1.60%) is an innovator in a competitive and growing industry. The company's fundamentals could push the stock to market-crushing returns when the next bull market begins. Here is why.
Performance that makes a difference
The world is much more digital today than even 10 years ago, leaving much precious information vulnerable to hackers. You might've seen headlines about companies being breached, compromising customer information, or leaking sensitive material. According to an annual study by IBM, the average breach costs an enterprise more than $4 million globally and $9 million for U.S. companies.
That same study notes that organizations using artificial intelligence and automated security detected breaches much faster, reducing the average cost of an incident by over $3 million. In other words, there's a real return on investing in quality cybersecurity products.
SentinelOne specializes in endpoint protection, which focuses on the points of entry on a network. Examples of endpoints include desktop and laptop computers, mobile devices, smartwatches, and internet-connected devices. SentinelOne installs software on an endpoint device, which tracks activity and files, looking for suspicious items. It competes with fellow cybersecurity company CrowdStrike, among traditional security and antivirus vendors.
The company's top-selling point is that it uses artificial intelligence to provide autonomous protection that's faster and more effective than others. SentinelOne does score very well in various third-party evaluations by technology organizations like Gartner and MITRE Engenuity.
Rapid growth and improving margins
SentinelOne is feverishly chasing growth, and it has succeeded, growing revenue at triple-digit rates since its initial public offering (IPO) in the summer of 2021. On the flip side, the company isn't profitable now, with $194 million in cash losses over the past four quarters. However, you can see below that the operating margin is improving over time, signaling that SentinelOne can become profitable as long as its revenue keeps growing faster than its spending.
S Revenue (TTM) data by YCharts. TTM = trailing 12 months.
This aggressive growth strategy can backfire if a business starts running low on cash, especially when stock prices are depressed. Raising money by issuing new shares can be disastrous when prices are low. Fortunately, SentinelOne is well funded, with $700 million in cash against zero debt. SentinelOne could continue losing money at its current pace and still go three years before running out.
Ideally, cash burn slows, and SentinelOne comes closer to turning a profit over that time. But the point is that investors shouldn't need to worry about the balance sheet anytime soon.
SentinelOne's Valuation
The exciting part is that SentinelOne's share price has plummeted while the business keeps growing. That has quickly depressed its valuation from a peak price-to-sales ratio (P/S) of 106 to under 12 today.
S PS Ratio data by YCharts. PS Ratio = price-to-sales ratio.
The company will eventually need to show it can make money in order for the stock to make you money. This is something investors should monitor over the coming quarters. Still, the potential upside is tantalizing here. The stock's valuation could never rebound from here, and the business is still growing so fast that it may not matter over the long run. Analyst estimates show SentinelOne approaching $1 billion in revenue three years from now. Even at the current P/S ratio, the resulting $12 billion market cap represents 169% in share price upside from today.
Nothing is promised in investing, and cybersecurity is ruthlessly competitive, so beware of making assumptions too far into the future. With that said, SentinelOne has the ingredients of a market-smashing investment when the next bull market arrives.
