Seeing a stock you own plunge after an earnings report is any investor's nightmare. Unfortunately, shareholders of cybersecurity company SentinelOne (S 1.84%) had to watch in horror when the company's earnings report for the quarter ending April 30 sent shares lower by more than 30%.
The stock market can be volatile day to day, but such a significant drop usually comes with reasons that should at least have investors on guard for major red flags. Some might even consider a stock uninvestable. Admittedly, SentinelOne did reveal quite a bit of bad news, so one should at least understand the negativity.
However, such a drop after it's already fallen throughout a tech stock bear market may now make SentinelOne's stock an opportunity for patient investors. Here's why the stock fell and, more importantly, why this dip could be worth buying.
SentinelOne is taking its medicine
The cybersecurity space is highly competitive, which will naturally lead to comparisons between the industry's top companies. SentinelOne has been compared to CrowdStrike Holdings since its IPO as two companies with highly regarded products and stellar growth rates.
CrowdStrike has always been a bit further along than SentinelOne. While it's not growing as fast as SentinelOne, the company has a much larger revenue base and is cash flow positive. Meanwhile, SentinelOne hasn't gotten there yet -- revenue is much smaller, and it's burning cash, though its operating margin is heading in the right direction each quarter.
S Revenue (TTM) data by YCharts
But after posting several quarters of triple-digit revenue growth, SentinelOne shocked Wall Street with soft guidance during its Q1 earnings. Management guided for just 41% revenue growth for the entire year. In other words, after posting 70% growth in Q1, management expects a big slowdown over the remainder of the year.
CEO Tomer Weingarten explained that the economic environment has become harder and that sales had some big contracts miss quarterly deadlines. But how much sense does that make, given the dramatic reduction in growth expectations through the rest of the year?
Additionally, the company disclosed some revenue accounting errors where revenue was incorrectly recorded for some past renewals and up-selling transactions. It's a bad look that might have left a sour taste in investors' mouths.
Resetting expectations
The market has valued SentinelOne and CrowdStrike pretty closely for most of the past year, a case of two companies with stellar products -- one growing faster versus one more profitable. However, the arguably faceplant-like quarter from SentinelOne broke that correlation. The market swiftly rerated SentinelOne to a steep discount to CrowdStrike.
S PS Ratio (Forward) data by YCharts
I'm not arguing against that -- CrowdStrike has become the better-executing company at this point, and I don't think there is much argument otherwise. However, it's an opportunity to reset expectations for SentinelOne and evaluate whether there's an opportunity moving forward.
Here's the bottom line
SentinelOne is now one of the cheapest stocks in the cybersecurity sector, with several positives working for it. Third-party research firms like Gartner highly regard the company's Singularity Platform, and SentinelOne does business with half of the Fortune 10. Estimated revenue growth is still 41% year over year this year, and growth could always reaccelerate.
Financially, SentinelOne burned through $188 million in cash over the past year, and that's shrinking. With more than $1 billion in cash on the books, there should be enough cash to fund the business to profitability.
Companies rarely perform at peak levels indefinitely; there are stumbles and challenges. SentinelOne is going through its first dose of adversity since going public -- now it's time to see how the business bounces back. The fundamental ingredients remain for a long-term winner, so buying the dip here isn't necessarily bad.
Just make sure you're approaching the stock cautiously. SentinelOne must prove to the market that it's not losing its mojo. If it can bounce back in the coming quarters, today's prices might have investors saying "could of, should of, would of" five years from now.
