What happened
Shares of cybersecurity company SentinelOne (S 1.47%) gained 33% in May, according to data provided by S&P Global Market Intelligence. In this article, I'll explain why that huge jump in stock price didn't hold.
So what
Stock prices can be driven by two factors: business fundamentals and market sentiment. Market sentiment tends to drive stock prices over shorter time periods whereas business fundamentals tend to eventually win out in the end.
Looking at the stock price of SentinelOne side by side with key competitor CrowdStrike, I believe it's quite clear that market sentiment drove cybersecurity stocks generally higher in May. Movements for the two stocks were virtually identical even though neither company reported anything concerning business fundamentals.
That said, Wall Street was increasingly bullish about SentinelOne stock in May. Several analysts raised their price targets for SentinelOne stock, including Raymond James analyst Adam Tindle, who initiated coverage with a strong buy rating, according to The Fly. But again, this relates to market sentiment, which is only a short-term stock price driver.
It wasn't until June 1 that investors got an update regarding SentinelOne's business. And when they did, the stock gave back all of its gains from May. It's down 39% month to date as of this writing.
SentinelOne's revenue in its fiscal first quarter of 2024 (which ended in April) fell short of management's guidance. And management lowered its full-year revenue guidance when it reported Q1 results, which explains why the stock is down so much. While the business is growing, it isn't growing as expected.
This stands in stark contract to CrowdStrike, which reported its own financial results the day before SentinelOne. For its part, CrowdStrike beat expectations and raised its full-year guidance, adding to the sting from SentinelOne.
Now what
I do believe concerns with SentinelOne are legitimate. Based on management's updated guidance, the company expects $325.6 million in revenue in the back half of fiscal 2024, at most. That's only up 35% from the comparable period of 2023.
For perspective, Q1 revenue for SentinelOne was up 70% year over year. Therefore, the growth rate is expected to decelerate at an alarming pace.
Adding to concerns, SentinelOne isn't expected to reach profitability as its growth rate drops. Management is guiding for an adjusted operating margin of negative 25% to 29% -- generally accepted accounting principles (GAAP) numbers will likely be much worse.
In summary, SentinelOne will be burning through a lot of cash as its business slows down, which isn't great.
However, there are silver linings with SentinelOne. The company is retaining customers and gaining new ones, albeit at a slower pace. Moreover, it has $1.1 billion in cash, equivalents, and investments, meaning it's extremely well capitalized as it burns cash.
Both SentinelOne and CrowdStrike mentioned how hard it is to sign deals in the current macroeconomic climate. So the hope is that SentinelOne's business will pick back up when outside factors improve.
