Nvidia (NVDA 6.18%) is one of the most popular names in the artificial intelligence (AI) space. That's because the company's products and services play a mission-critical role in the adoption of this technology. The market is catching on to this fact and it goes some ways to explain why the stock gained a whopping 189% so far this year.
AI supercharged the sales of Nvidia's data center graphics cards, which are critical for training AI models and running inference applications. The massive demand is expected to bring Nvidia 64% year-over-year revenue growth in the current quarter to $11 billion. Even better, analysts anticipate Nvidia will sustain this momentum for the rest of the fiscal year (ending in late January 2024) and post almost $43 billion in revenue, which would be a big increase over fiscal 2023's $27 billion.
Investors who still want in on Nvidia's AI-driven rally will have to buy stock valued at a rich 41 times sales. Though Nvidia may be able to justify such an expensive valuation thanks to its dominance in the multibillion-dollar market for AI chips, there are relatively cheaper options for investors looking to jump onto the AI gravy train.
SentinelOne (S 1.70%) is one such AI play that investors may want to take a look at.
SentinelOne is on track to take advantage of a fast-growing AI niche
SentinelOne provides AI-enabled cybersecurity services to customers. The company's Singularity Cloud cybersecurity platform uses AI algorithms to protect an organization's endpoints, cloud workloads, user identities, and data. SentinelOne claims that its AI-powered cybersecurity platform allows "modern enterprises to defend faster, at greater scale, and with higher accuracy across their entire attack surface."
These characteristics of AI-driven cybersecurity offerings partially explain why the technology is gaining traction. According to a third-party estimate, AI within cybersecurity could open a $134 billion annual revenue opportunity by 2030, up significantly from 2021 estimates suggesting a $15 billion opportunity. Either estimate suggests terrific room for growth at SentinelOne since the company's trailing-12-month revenue stands at $477 million.
The company released its fiscal 2024 first-quarter (ended April 30, 2023) results last month. It reported impressive year-over-year revenue growth of 70% to $133 million. What's more, SentinelOne's annualized recurring revenue (ARR) grew at a faster pace of 75% to $564 million. This metric measures the subscription contracts SentinelOne has in force at the end of a quarter to the contracts in force in the year-ago period. So, the impressive growth in ARR suggests that more customers are taking up its offerings.
This is also evident from the 43% year-over-year growth in SentinelOne's customer count to almost 11,000 last quarter. More importantly, the company was able to drive increased spending from its existing customer base as well. The number of customers with an ARR of more than $100,000 increased 61% year over year last quarter, outpacing the growth in the company's overall customer base.
SentinelOne also reported a dollar-based net retention rate of more than 125% last quarter. This metric compares the company's ARR from its customers at the end of a period to the ARR from those same customers at the end of the prior-year period.
However, SentinelOne's guidance wasn't appreciated by investors. The stock price fell big time last month as company management forecast $141 million in revenue in the current quarter, which would be an increase of 38% as compared to the year-ago quarter. That points toward a remarkable slowdown from the first quarter of the fiscal year.
Management also slashed its full-year guidance and now expects revenue to land at $595 million in fiscal 2024 at the midpoint of its range. An earlier forecast called for revenue of $631 million to $640 million for the year. SentinelOne's updated annual revenue guidance would translate into a 41% increase over fiscal 2023. For some perspective, the company's annual revenue had more than doubled last fiscal year.
SentinelOne blamed the weak economic environment for slashing its guidance. Management explained in the shareholder letter that:
Macroeconomic pressures continue to impact deal sizes, sales cycles, and pipeline conversion rates. While not entirely new, the impact from these factors was more pronounced in Q1. Together, these evolving dynamics also impacted our expectations for Q2 and fiscal year 24.
Given the guidance, it was not surprising to see SentinelOne's stock price plunge a whopping 35% on June 1 following the release of its results. Long-term investors, however, should look at this as an opportune time to buy SentinelOne.
The valuation makes this AI stock an enticing bet
While it is true that SentinelOne's growth is going to slow down in the near term because of macroeconomic headwinds, investors should note that the company is still on track to deliver healthy growth this year. Additionally, the company's fast-growing customer base, stronger spending by existing customers, and long-term opportunity in the AI-powered cybersecurity space should allow it to maintain strong growth levels in the long run.
S Revenue Estimates for Current Fiscal Year data by YCharts
This is also evident from analysts' expectations that SentinelOne's bottom line could improve at an annual rate of 47% for the next five years. That's why investors should consider taking advantage of the recent dip in SentinelOne stock, especially considering that it now trades at 9 times sales. While that's high when compared to the S&P 500's price-to-sales ratio of 2.5, it is significantly lower than Nvidia's sales multiple of 41.
Also, SentinelOne's current sales multiple is well below where it was a year ago, and that's despite a significant increase in the company's revenue.
S Revenue (TTM) data by YCharts
All this indicates that investors are getting a good deal on SentinelOne stock right now, especially considering the company's healthy growth even in difficult circumstances and its solid long-term potential thanks to catalysts such as AI. As such, investors looking for a relatively cheaper alternative to Nvidia to take advantage of the AI boom can consider SentinelOne for their portfolios.
