After tech stocks took an absolute drubbing in 2022, they've gotten off to a hot start in 2023. The Nasdaq Composite index rallied more than 11% since the start of the year. Top cybersecurity names Palo Alto Networks (NASDAQ: PANW), Fortinet (NASDAQ: FTNT), and CrowdStrike Holdings (NASDAQ: CRWD) are up by even larger percentages.
Data by YCharts.
And then there's SentinelOne (S -0.10%). Cybersecurity remains a top priority for organizations around the globe, even in uncertain-at-best times, and SentinelOne has continued to expand its business at a rapid pace. Yet the stock has barely budged so far this year, and continued to struggle after giving up more than 80% of its value since it hit its all-time high in late 2021.
It looks like a new bull market is beginning to form, but is this cybersecurity software upstart worth buying now?
SentinelOne's technology is clearly impressive
SentinelOne is an endpoint software security provider. It offers cloud-based protection for devices like PCs, laptops, and smartphones accessing a business's data from outside its protected network, such as from remote or work-from-home locations. Endpoint protection can also be extended to other electronics such as Internet of Things devices (like for an employee using equipment in the field) or point-of-sale terminals at retailers.
CrowdStrike and Microsoft (NASDAQ: MSFT) are leaders in this fast-growing segment of cybersecurity, but by some metrics, smaller SentinelOne claims it has superior technology. Its platform was designed to completely automate the detection of cyberattacks, though it lacks some of the other capabilities that its larger rivals offer. Tech researcher Gartner (NYSE: IT) has listed SentinelOne not too far behind Microsoft and CrowdStrike in its rankings for endpoint protection platforms.
Perhaps the best proof that SentinelOne is onto something big is its sales growth. In its fiscal 2023, which ended Jan. 31, revenue soared by 106% to $422 million. Annualized recurring revenue (an oft-cited metric among subscription software companies) was up 88% year-over-year to $549 million in its fiscal Q4.
Granted, that growth included the $616.5 million acquisition of security software peer Attivo Networks. This growth shows the company's security chops are winning over customers.
What's eating SentinelOne stock?
Its growth is impressive, so why does its share price keep falling? As great as its rapid-expansion story has been since its 2021 IPO, SentinelOne had a ludicrous valuation right before the bear market of 2022 began. Shares have fallen to reflect the understanding that the company's growth will (at some point) decelerate. And indeed, that deceleration appears to be starting.
Management's initial guidance for fiscal 2024 calls for revenue of $631 million to $640 million, which at the midpoint would be an increase of about 50% from fiscal 2023. While that's nothing to scoff at, it faces a tough percentage comparison to last year when the top line more than doubled.
What's more, SentinelOne remains deeply unprofitable. Its net loss was $379 million in fiscal 2023, and its free cash flow was negative $211 million. Much of the difference between the two metrics can be attributed to stock-based compensation expenses of $164 million -- equal to just shy of 4% of SentinelOne's current market cap.
The good news is that SentinelOne continues to deliver rapid revenue growth to shareholders on a per-share basis (which includes the effect of new stock paid to employees).
Data by YCharts.
Is the stock a buy now?
To be clear, I believe it could still be rough going for SentinelOne stock for at least a couple more quarters. Though its losses are narrowing, management expects to generate another loss (both on a GAAP and adjusted basis) in this fiscal year. This is a young business, and as long as it can generate the kind of sales growth it's expecting, gobbling up market share will be of more importance than managing for maximum profitability.
I believe that to be a sound strategy, but it isn't what the average investor is interested in at the moment with recession the current worry.
Nevertheless, SentinelOne is beginning to look like an attractive investment to me -- but only for investors who have years to be patient as SentinelOne attempts to reach a larger scale before turning a profit. The company entered the new year with $1.2 billion in cash and investments on its books, no debt, and it trades for just 5.5 times enterprise value (market cap minus net cash and equivalents) to expected fiscal 2024 revenue.
I'd like to reiterate my belief that SentinelOne stock will be highly volatile, and larger and profitable cybersecurity stocks could greatly outperform it in the coming quarters. But if SentinelOne can deliver on its outlook for the next year, its shares finally look compelling to me at this juncture. I'm considering firing up a dollar-cost averaging plan on this one to start building a position.
