Is SentinelOne Stock a Buy?

SentinelOne's (S -1.72%) stock plunged 36% during after-hours trading on June 1 following its release of a messy earnings report. For the first quarter of fiscal 2024, which ended on April 30, the cybersecurity specialist's revenue rose 70% year over year to $133 million but missed analysts' estimates by $3 million. It narrowed its adjusted net loss from $57 million to $42 million, or $0.15 per share, which bested analysts' forecasts by $0.02 per share.

Those headline numbers weren't too bad, but SentinelOne's soft second-quarter outlook and an unforeseen revision to a key growth metric spooked investors. Let's assess the damage and see if its post-earnings plunge is a good buying opportunity.

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A hypergrowth stock with hypergrowth valuations

SentinelOne differentiates itself from its cybersecurity peers with its Singularity extended detection and response (XDR) platform, which automates the entire threat detection process through AI algorithms instead of relying on teams of human analysts. It claims its approach is faster, more accurate, and easier to scale for growing organizations.

SentinelOne went public in June 2021. Its revenue, customers, and annual recurring revenue (ARR) have skyrocketed over the past three years. It has also consistently gained larger customers -- meaning those that generate more than $100,000 in ARR -- while its dollar-based net revenue retention rate has stayed above 100% and improved every year.

Data source: SentinelOne. *Not disclosed.

Investors were so impressed by SentinelOne's growth rates they bid its stock to an all-time high of $76.30 on Nov. 12, 2021. That was more than double its IPO price of $35, and gave the company an enterprise value of $18.7 billion -- or 91 times its fiscal 2022 sales and 44 times its fiscal 2023 revenue.

Those nosebleed valuations became unsustainable as rising interest rates and other macroeconomic headwinds drove investors away from hypergrowth stocks over the past year. SentinelOne's lack of profits -- whether calculated according to generally accepted accounting principles (GAAP) or using adjusted figures -- made it even less attractive.

SentinelOne's stock wasn't priced for a slowdown

SentinelOne's stock was so expensive that any sign of a deceleration would deflate its valuation. Its revenue rose 70% year over year, its customer count grew 43% year over year to 10,680, its ARR increased 75%, and its number of customers with more than $100,000 in ARR jumped 61% to 917. Yet all four of those growth rates decelerated from the previous quarter, as well as the entirety of fiscal 2023. Its dollar-based net revenue retention rate also dipped to 125%. During the conference call, CEO Tomer Weingarten attributed that across-the-board slowdown to "global macroeconomic pressures."

It expects that slump to persist, with just 38% year-over-year revenue growth in the second quarter and a 40%-42% increase for the full year. That means it will only expand at a slightly faster rate than CrowdStrike (CRWD 0.13%), the cloud-native cybersecurity leader that anticipates a 34%-36% rise in sales in its current fiscal year.

However, CrowdStrike is a much larger company that will likely generate five times as much revenue as SentinelOne this year. It's generally a red flag when the underdog is only growing at a comparable rate as a much larger market leader.

SentinelOne also recently modified the way it reports its ARR as a result of a "change in methodology and correction of historical inaccuracies." That abrupt revision shaved 5 percentage points from its reported year-over-year ARR growth in the first quarter, and could spark fresh concerns about the company's other accounting methods.

Its margins are improving, but it's still drowning in red ink

SentinelOne's adjusted gross margin rose from 58% in fiscal 2021 to 72% in fiscal 2023, then expanded again to 75% in the first quarter of fiscal 2024. Its adjusted operating margin also went from negative 107% in fiscal 2021 to negative 49% in fiscal 2023, and improved to negative 38% in Q1 of fiscal 2024.

It expects to end fiscal 2024 with an adjusted gross margin of 74%-75% and negative adjusted operating margin of 25%-29%. While those are certainly steps in the right direction, SentinelOne won't come close to breaking even on a non-GAAP (adjusted) basis anytime soon. That makes it a lot less appealing than CrowdStrike, which is firmly profitable by non-GAAP measures and gradually approaching GAAP profitability.

Is it the right time to buy SentinelOne?

SentinelOne's post-earnings plunge reduced its enterprise value to about $3 billion, or 5 times the revenue it expects to generate in fiscal 2024. That's a reasonable valuation, even if it only grows its sales by about 30% each year. It also seems a lot cheaper than CrowdStrike, which trades at 12 times its projected revenue for fiscal 2024.

Unfortunately, SentlnelOne could continue to trade at that discount until its sales growth stabilizes and it narrows its net losses. That won't happen anytime soon, so I'd rather avoid it and buy other, more balanced cybersecurity stocks instead.