Investors that bought shares of SentinelOne (S 1.70%) at the end of 2022 were doing very well. Through the end of May, the stock was up more than 40% year to date. But the sentiment shifted again following the latest earnings report. While Sentinel reported solid numbers that showed revenue up 70% over the year-ago quarter and improving profitability, soft guidance for the next quarter sent the shares down 38%.
SentinelOne has been a favorite of cybersecurity investors, primarily because of its blistering rate of revenue growth, where it has consistently been reporting revenue numbers much stronger than leader Crowdstrike Holdings and others. But the latest financial results shows that the macroeconomic environment is starting to catch up with the company.
Is it time for investors to cut their losses, or should investors look at the drop as a buying opportunity?
The worst isn't over
Almost every high-growth company in the market has reported decelerating revenue growth, but it's unusual to see a steep drop of 38% after one earnings release, even for a historically volatile stock like SentinelOne.
It wasn't so much that the 70% revenue growth was down from the previous quarter's 92% growth, or that management is seeing economic conditions impact deal sizes and sales cycles with prospective clients. The company's adjusted operating profit margin even showed a huge improvement, narrowing from -73% a year ago to 38% in the latest quarter.
One item that seemed to spook the market was management's change in how it calculates annual recurring revenue (ARR) -- a key metric that measures the annualized run rate of subscription revenue from the end of the quarter. This change reduced ARR by $27 million, or about 5% of total ARR in the quarter. As a result, ARR growth of 75% was lower than analysts expected.
Moreover, SentinelOne blamed its lower growth on lower usage and consumption trends, which it expects to continue in the near term. Guidance calls for revenue to grow 38% year over year next quarter, down from 124% in the year-ago quarter.
SentinelOne is still growing faster than everyone else
This isn't shaping up to be a great year, but if you're investing for retirement, you probably don't mind some volatility in the near term. The important question: Is SentinelOne's long-term growth trajectory still intact?
Keep in mind, Crowdstrike is also reporting slowing growth. It expects revenue to be up approximately 35% year over year next quarter, down from 42% in the fiscal first quarter.
Another fast-growing cybersecurity provider is Zscaler, which reported 46% year-over-year revenue growth last quarter and expects 35% growth in the next quarter.
SentinelOne is still growing faster than all of them, which speaks volumes about its competitive position. The difference now is that the stock is trading at a sizable discount on a price-to-sales basis. This signals that SentinelOne might be undervalued and due to rebound from its recent fall.
Data by YCharts
Despite slowing growth, investors can sleep well at night knowing that they are invested in a company serving a growing need across the global economy.
As management stated in its earnings report, "Cybersecurity remains a top priority for all enterprises amid a proliferation of cyberattacks that make the news headlines on a regular basis."
Most importantly, management noted that they continue to win the majority of legacy and next-generation vendors in the majority of competitive evaluations. This is backed up by the company's robust revenue growth.
Investors might want to keep the position small in their portfolio to account for near-term market volatility, but SentinelOne is still one of the best cybersecurity stocks to hold for the long term.
