The last few months look like nothing more than a head fake from AI-powered endpoint security provider SentinelOne (S +3.59%). The company provided a sizable downgrade to its expected growth for this year, and it wasn't at all what Wall Street was expecting. Following the earnings report, the stock will have given up all of its 2023-to-date rally and then some.
Meanwhile, fellow endpoint cybersecurity software company CrowdStrike Holdings (CRWD +3.04%) also reported earnings this week. It too is showing signs of slowing growth as customers tap the brakes on spending over economic concerns. But CrowdStrike is in a very different place than SentinelOne, as it's generating lots of profit. Can SentinelOne make a comeback, or is it time for investors to move on?
NYSE: S
Key Data Points
Overpromising and underdelivering is a bad look
On the surface, SentinelOne's Q1 fiscal 2024 results (the three months ended in April) certainly weren't bad. Revenue grew 70% year over year. The results missed the mark, though, and SentinelOne downgraded expectations for the rest of the fiscal year.
|
Guidance |
Fiscal 2024 Revenue Outlook |
Implied YoY Growth (at Midpoint) |
|---|---|---|
|
Full-year, provided March 14, 2023 |
$631 million to 640 million |
51% |
|
Updated, provided June 1, 2023 |
$590 million to 600 million |
41% |
Data source: SentinelOne.
By contrast, CrowdStrike slightly exceeded its own Q1 expectations and upgraded guidance for the rest of this year.
|
Guidance |
Fiscal 2024 Revenue Outlook |
Implied YoY Growth (At Midpoint) |
|---|---|---|
|
Full-year, provided March 7, 2023 |
$2.96 billion to $3.02 billion |
34% |
|
Updated, provided May 31, 2023 |
$3 billion to $3.03 billion |
35% |
Data source: CrowdStrike.
Investors' feelings about these diverging outlooks from the two endpoint security companies was pretty clear from the post-earnings stock price reaction.
Data by YCharts.
The bear market isn't over for some stocks
To be clear, SentinelOne's new expected growth rate is far from tepid. But there's a glaring issue: SentinelOne operates at a steep loss by all metrics. The company is making progress toward breakeven -- the adjusted operating loss margin is expected to narrow to a range of 29% to 25% this year, compared with a 49% loss last year.
However, rapidly slowing growth and rising expenses can be a death knell. I hate to harp on this metric again, but it's especially evident in employee stock-based compensation (SBC), which can be especially harmful for a company that is still burning through cash. Stocks are valued based on future cash flows attributable to shareholders, so currently nonexistent profit that's simultaneously getting diluted by new stock issuance is a bad combo. SBC weighed in at $55.5 million last quarter, compared with $31.6 million the year prior.
In other words, any future cut of the profit pie -- which, I'll admit, still looks to be at least a couple of years away -- is getting smaller for existing shareholders.
In contrast, CrowdStrike is highly profitable on a free cash flow basis, and delivering free cash flow-per-share growth.
Data by YCharts.
Promises of AI-powered cybersecurity aren't going to cut it
The cybersecurity market is especially unforgiving to companies in a boat like the one SentinelOne is currently in. In this industry, the ball is constantly moving as hackers up their game to infiltrate an IT operation.
This is problematic for a company that isn't profitable yet, as it makes the company less nimble when it comes time to pivot. (Remember FireEye?) I'd say the upshot here for SentinelOne is that it had $718 million in cash and short-term investments on hand at the end of April, and another $424 million in long-term investments. It isn't going to run out of money anytime soon.
Of course, a pivot in the tech world could be happening right now. SentinelOne and CrowdStrike both announced new generative AI tools aimed at helping customers boost their defensive abilities. But it appears that lots of software companies have been able to quickly add these new AI features to their product suites without much effort. Cybersecurity is hypercompetitive, and it's only a matter of time before a shiny new upstart emerges to come and steal the thunder from the current market favorites.
If you were like me and dipped your toe in to test the water, SentinelOne's latest earnings report has me seriously second-guessing my mild optimism a few months ago. It looks as if the bear market isn't over for this stock. The company can turn things around, but it has a lot of work cut out for it if it's to succeed. In the meantime, there are better stocks in the cybersecurity universe to invest in right now.
