SentinelOne (S -1.72%) and Palantir (PLTR 0.56%) both leverage AI technologies to challenge their legacy software peers. SentinelOne's Singularity XDR (extended detection and response) platform completely replaces human analysts with automated AI algorithms, which it claims are faster, more accurate, and more cost-efficient for companies.
Palantir's Gotham platform aggregates data from a wide range of external sources to help government agencies make mission-critical decisions. Its Foundry platform helps commercial customers make similar data-driven business decisions.
Both companies initially dazzled investors with that disruptive potential, and their stocks hit record highs during the buying frenzy in growth stocks in 2021. Yet SentinelOne and Palantir now both trade nearly 80% below those levels. Rising interest rates drove investors toward more conservative investments over the past year, and both companies failed to live up to their bubbly valuations as their growth rates cooled off. Should investors buy either of these out-of-favor growth stocks today?
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SentinelOne is still a hypergrowth company
SentinelOne's revenue rose 100% in fiscal 2021, 120% in fiscal 2022, and 106% to $422 million in fiscal 2023 (which ended this January). It ended fiscal 2023 with over 10,000 customers, compared to about 2,700 customers in April 2020.
Within that total, its number of higher-value customers that generated more than $100,000 in annual recurring revenue (ARR) jumped 109% in fiscal 2021, 137% in fiscal 2022, and grew 74% to 905 in fiscal 2023. It also ended fiscal 2023 with an impressive dollar-based, net revenue-retention rate of more than 130%.
For fiscal 2024, SentinelOne expects its revenue to rise 50% to 52%. Based on the midpoint of those expectations and its enterprise value of $4.2 billion, SentinelOne trades at 6.5 times this year's sales. That valuation might seem reasonable relative to its explosive growth rates, but SentinelOne is still deeply unprofitable.
On a generally accepted accounting principles (GAAP) basis, its net loss widened from $271 million in fiscal 2022 to $379 million in fiscal 2023. Analysts expect that net loss to widen to $394 million in fiscal 2024, and it's nowhere close to breaking even on a non-GAAP basis. That red ink, along with its dwindling liquidity (its cash and equivalents plunged 92% year over year to $138 million at the end of fiscal 2023), makes it a risky stock to hold as interest rates continue to rise.
There are also plenty of competitive threats. SentinelOne might have carved out a niche with its automated AI algorithms, but other, larger cybersecurity companies -- including CrowdStrike and Palo Alto Networks -- have already been expanding their diversified ecosystems into its backyard. The competition could limit SentinelOne's pricing power and prevent it from ever generating sustainable profits.
Palantir's high-growth days might be over
Palantir's revenue rose 47% in 2020 and 41% in 2021, but only grew 24% to $1.9 billion in 2022. It expects its revenue to only rise 14% to 17% in 2023. It attributed that deceleration to the persistent macroheadwinds for its commercial business.
Palantir's slowdown wasn't disastrous, but it broadly missed its own long-term goal of achieving "30% or greater" annual revenue growth through 2025. Analysts expect its revenue to rise 16% to $2.2 billion this year. Based on its enterprise value of $15.7 billion, Palantir still doesn't look like a screaming bargain at 7 times this year's sales.
But as Palantir's sales growth cooled off, its profitability improved. It turned profitable for the first time on a GAAP basis in the fourth quarter of 2022, driven by a big reduction in its stock-based compensation, narrower losses from its investments, and the acquisition of a joint venture in Japan. Its GAAP net loss narrowed from $520 million in 2021 to $371 million in 2022, and analysts anticipate a net profit of $44 million in 2023.
But on a non-GAAP basis, Palantir's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) fell 9% to $443 million in 2022 as the growth of its higher-margin commercial segment cooled off. Palantir expects the commercial segment's growth to "reaccelerate in 2023" as the macro headwinds wane, but it still faces stiff competition from similar analytics platforms like Salesforce's Tableau and Alteryx in that crowded space.
Analysts expect Palantir's adjusted EBITDA to rise 20% to $530 million this year, but its stock still doesn't look cheap at 30 times that forecast. On the bright side, it ended 2022 with $2.6 billion in cash and equivalents -- up from $2.3 billion a year earlier -- so it might still be a more appealing bear-market play than cash-starved companies like SentinelOne.
The better buy: Palantir
I'm not a fan of either of these stocks right now, but I believe Palantir's rising profits and stronger balance sheet make it a better pick than SentinelOne. SentinelOne might still have a bright future, but its stock could easily be cut in half again during a market downturn because it hasn't proven that its business model is sustainable yet.
