SentinelOne's (S -0.16%) stock jumped 7% on March 15 after it posted its latest earnings report. For the fourth quarter of fiscal 2023, which ended on Jan. 31, the cybersecurity company's revenue rose 92% year over year to $126 million and beat analysts' expectations by $1 million. Its adjusted net loss narrowed from $44 million to $37 million, or $0.13 per share, and also cleared the consensus forecast by three cents.

For the full year, SentinelOne's revenue surged 106% to $422 million, compared to its 120% growth in fiscal 2022, but its adjusted net loss widened from $178 million to $195 million. That top-line growth is impressive, but SentinelOne's stock remains more than 50% below its IPO price and nearly 80% below its all-time high. Let's see why this hypergrowth stock crashed, and if it's worth buying as a long-term investment.

A digital illustration of a padlock on a circuit board.

Image source: Getty Images.

How fast is SentinelOne growing?

Like many other cybersecurity companies, SentinelOne provides its services through a mix of on-site appliances and cloud-based services. But what sets it apart from most of its peers is its Singularity extended detection and response (XDR) platform, which automates the entire threat detection process through AI algorithms instead of teams of human analysts. It claims that approach is faster and less prone to mistakes.

A lot of companies seem to agree. Prior to its IPO in mid-2021, SentinelOne served about 4,700 customers. That figure had more than doubled to over 10,000 by the end of fiscal 2023.

SentinelOne's annualized recurring revenues (ARR) rose 88% to $549 million at the end of fiscal 2023. Its number of customers that generated more than $100,000 in ARR rose 74% to 905, while its dollar-based net revenue retention rate -- which gauges its year-over-year revenue growth per customer -- came in "above 130%".

As the following table illustrates, SentinelOne's growth in customers decelerated in fiscal 2023 as the macro headwinds forced some companies to rein in their software spending, but it offset some of that pressure with a higher net revenue retention rate, which it attributed to the continued success of its "land-and-expand" strategy.

Metric

FY 2021

FY 2022

FY 2023

Revenue Growth

100%

120%

106%

Customer Growth

N/A*

70%

50%

ARR Growth

96%

123%

88%

Growth in Customers with $100,000+ in ARR

109%

137%

74%

Dollar-Based Net Revenue Retention Rate

117%

129%

130%+

Data source: SentinelOne. *Not disclosed.

For fiscal 2024, SentinelOne expects its revenue to rise 50%-52%. That would represent a significant slowdown from its triple-digit growth over the past three years, but it's irrational to expect a company to double its revenue every year.

Meanwhile, its margins are improving as its revenue growth cools off. Its adjusted gross margin rose from 63% in fiscal 2022 to 72% in fiscal 2023, and it expects that figure to rise to 73.5%-74.5% in fiscal 2024. CFO Dave Bernhardt attributed that expansion to its "increasing scale and improving data processing efficiencies" during the latest conference call. Its adjusted operating margin improved from negative 85% to negative 49%, and it expects it to rise to negative 25% in fiscal 2024.

So why did SentinelOne's stock crash?

SentinelOne is taking a lot of steps in the right direction, but its stock was cut in half over the past year for two simple reasons. First, it was grossly overvalued. At its all-time high of $76.30 on Nov. 12, 2021, SentinelOne's enterprise value hit $18.7 billion, or 91 times the revenue it would generate in fiscal 2022. But today it has an enterprise value of $3.7 billion -- or six times the revenue it expects to generate in fiscal 2024.

That's a surprisingly reasonable valuation relative to its growth rates and industry peers. CrowdStrike (CRWD 1.30%), which is expected to generate 34% revenue growth this year, trades at nine times that estimate. Zscaler (ZS 0.09%), which is expected to grow its revenue by 43% this year, trades at ten times that forecast.

Second, SentinelOne's red ink is tough to overlook, especially as rising interest rates drive investors toward more conservative investments. On a generally accepted accounting principles (GAAP) basis, SentinelOne's net loss still widened from $271 million in fiscal 2022 to $379 million in fiscal 2023. Even after excluding the stock-based compensation that consumed 39% of its revenue in fiscal 2023, the company still couldn't come close to breaking even on a non-GAAP basis. CrowdStrike, Zscaler, and many other cybersecurity companies are currently profitable by non-GAAP measures.

SentinelOne's persistent non-GAAP losses indicate its business model isn't sustainable yet. That's worrisome, because it was only sitting on $138 million in cash and equivalents (along with $486 million in short-term investments) at the end of fiscal 2023. It still had a low debt-to-equity ratio of 0.4 at the end of fiscal 2023, but that leverage could climb quickly if it needs to raise fresh funds in this tough market.

Is it the right time to buy SentinelOne?

SentinelOne is still growing rapidly, but this is a market that favors stability over breakneck growth. Therefore I can't recommend buying SentinelOne until it comes closer to breaking even on a non-GAAP basis. So for now, I'd rather stick with CrowdStrike, Zscaler, and other more balanced cybersecurity companies than this hypergrowth stock.