Growth has been a challenge for most technology companies over the last 18 months, as the economic environment slowed on the back of rising inflation and interest rates. Cybersecurity company SentinelOne (S -1.25%) has not been immune, but its slowdown looks very different to others -- it has continued to more than double its annual sales.
Nonetheless, SentinelOne stock price has been crushed and currently sits 81% below its all-time high. Why? Investors have flocked to safe assets like bonds and blue chip stocks, whereas SentinelOne is perceived as a riskier bet because the company isn't generating a profit yet.
But investors might be looking at it all wrong; here's why SentinelOne stock is a buy on the dip.
SentinelOne protects businesses with advanced artificial intelligence
First, let's dive into SentinelOne's platform. Many cybersecurity companies are using artificial intelligence (AI) to better protect their customers because AI has the ability to process mass amounts of data quickly, and uses that information to proactively eliminate threats before they cause damage. SentinelOne has built that advanced technology into a portfolio of advanced tools, and delivers them on one simple, customizable platform called Singularity.
It protects the cloud, the end point, and identity (credentials). These are critical vulnerabilities for modern companies because they're shifting more of their operations online and relying heavily on remote workers, which makes the attack surface substantially larger.
Singularity's advantage is that it enables organizations to observe their entire cybersecurity stack on a "single pane of glass", wherein they can view and control their security operations by unifying data from multiple sources onto a single platform. That means incident response times are lightning fast across departments, eliminating communication barriers and improving effectiveness.
SentinelOne emphasizes automation, because it believes machines will make more efficient decisions than humans, particularly with response times. Its AI models learn by ingesting data from hundreds of trillions of events, and all customers have access to the Singularity data lake, which is a first-of-its-kind unified solution with endpoint detection and response (EDR) hunting and querying capabilities built in.
The result is a more cost-friendly security solution, which is an attractive proposition given Singularity's comprehensive feature set.
SentinelOne's financial growth continues to soar
The global economy is in a tough place right now, but according to a survey conducted last year by Morgan Stanley, cybersecurity is the last expense companies plan to cut even in the event of a recession.
It's evident in SentinelOne's blistering revenue growth. Originally, the company expected to generate $370 million in sales during fiscal 2023, but surging demand prompted it to raise that forecast several times throughout the year. And yet, it still beat its most recent estimate of $421 million, growing by 106% year over year.
The survey results also came through in SentinelOne's net revenue retention rate, which was 130% at the end of fiscal 2023 (ended Jan. 31), a 5% jump from the same time last year. It means existing customers were spending 30% more money with SentinelOne than they were a year ago.
That's why SentinelOne stock is a buy
SentinelOne generated a net loss of $378 million during fiscal 2023. That was up from $271 million in fiscal 2022, but it was an improvement as a percentage of revenue, which indicates progress (its net loss was 89% of revenue in fiscal 2023 compared to 132% in fiscal 2022).
While the company is still nowhere near profitability, its losses are a result of its aggressive investments in growth. Consider its net revenue retention rate mentioned earlier, for example. Each new customer SentinelOne signs up is becoming significantly more valuable with each passing year, so spending money to get them in the door makes perfect sense.
Plus, the company estimates its addressable opportunity could top $100 billion within the next few years, and capturing as much of that as possible will be key to staying ahead of the competition.
Finally, SentinelOne has the financial resources to maintain its loss rates for a few more years before prioritizing profitability, because it has $1.2 billion in cash, equivalents, and investments on its balance sheet.
From a valuation standpoint, the 80% decline in SentinelOne stock means it has never been more attractive. Its price-to-sales (P/S) ratio is currently 9.4, which is the cheapest level since the company listed publicly in 2021. It's even cheaper than its key competitor, CrowdStrike, which trades at a P/S ratio of 13 -- and yet SentinelOne is growing its revenue faster.
Through that lens, investors might look back in a few years from now and realize the dip in SentinelOne stock was a great buying opportunity.
