New software tools like ChatGPT put artificial intelligence onto Wall Street's center stage. Ask AI to write a poem, plan a trip, or create code, and it can put out answers in seconds for something that might take humans minutes or hours.
AI's potential is the biggest reason I own the cybersecurity stock SentinelOne (S -0.09%). AI is in the company's DNA and could make it a long-term leader in a high-growth sector. Here's why investors should consider the stock for their long-term portfolios now.
AI makes SentinelOne go 'round
SentinelOne is an endpoint cybersecurity company. An endpoint is a physical device, such as a desktop computer, laptop, or mobile device, that connects to a network. It's estimated that roughly 70% of breaches start at endpoint devices, so this is essentially the front line in defending an enterprise from malicious threats.
But cybersecurity is crowded with competitors, and SentinelOne is smaller than many of its peers, including CrowdStrike, Microsoft, Palo Alto Networks, and more. SentinelOne says that its automated platform, powered by artificial intelligence, makes it a superior product. SentinelOne sits at a device's kernel level, the core brain of a device that's always running, and monitors everything it does, using AI to flag and respond to suspicious items.
The company claims its technology detects more and responds faster than other cybersecurity products. Of course, everyone will claim they're the best, but there is some third-party evidence to support the idea. For starters, it's led the MITRE Engenuity ATT&CK evaluation -- a respected measure of performance -- for the past three years and placed highest in research firm Gartner's Critical Capabilities testing. It's also been certified for government applications.
While no cybersecurity product is perfect, the impressive recognition SentinelOne has garnished speaks well for its product quality.
What should investors key on moving forward?
More importantly, how does this translate to SentinelOne as an investment? The company's eager lean into AI can serve it in two ways: First, it can help it grow. Many companies use antiquated products like anti-virus, which have been around almost as long as computers. SentinelOne can tell a compelling story about its AI capabilities, a giant leap from cybersecurity's early years.
Statista believes the broader cybersecurity market will average 10% annual growth over the coming years. However, SentinelOne is growing at a nearly triple-digit clip, and its vastly higher growth rate suggests that its sales efforts and marketing story resonates with customers. The company added about 750 new customers in its most recent quarter, a 50% year-over-year increase.
S Revenue (TTM) data by YCharts.
Second, AI could also give SentinelOne an eventual financial edge. Many of SentinelOne's competitors rely on humans to varying degrees to analyze threats as their system flags them. SentinelOne's autonomous platform could help it become more profitable, needing less human labor as it grows. The company isn't yet profitable, but its operating margin did improve from -107% to -49% year over year in the fourth quarter of its 2023 fiscal year.
SentinelOne still isn't big enough to offset its tremendous growth investments, including spending 50% of its trailing-12-month revenue on research and development. However, that could be much different when the business is doing billions in revenue instead of mere millions. Both revenue growth and margin improvement will be a must-watch for investors over the coming quarters and years.
Consider buying shares today because...
The stock has gotten increasingly attractive over the past 18 months. While the hype of AI has taken some stocks to questionably lofty heights, SentinelOne hasn't joined in the fun. Instead, the stock sits at its all-time low price-to-sales (P/S) ratio of just 10, which will quickly fall further because of SentinelOne's blazing revenue growth.
Perhaps SentinelOne's lack of profits hurts investor sentiment, but the company has enough cash to fund the business for three years based on its cash burn over the past year. Investors shouldn't have to worry about the company running out of money as long as profit margins keep improving.
S PS Ratio data by YCharts.
The AI hype has taken over Wall Street, and like most fads, many companies will fail to deliver the goods. SentinelOne's excellent technology and improving financials make it a potential long-term winner. The stock is staying under the radar, which gives investors an excellent opportunity to add shares to their portfolios.
