SentinelOne (S 1.70%) and Twilio (TWLO 1.47%) both aim to disrupt older industries by using innovative technologies. SentinelOne is a cybersecurity company that automates the entire threat response process through artificial intelligence (AI) algorithms, which it claims are faster, more efficient, and less prone to mistakes than human analysts. Twilio's cloud-based platform processes text messages, voice calls, and other communication features for mobile apps. Instead of spending a lot of time creating those features from scratch, developers can simply add a few lines of code to outsource them to Twilio.
SentinelOne and Twilio initially attracted a lot of attention during the buying frenzy in growth and meme stocks throughout 2021. SentinelOne went public at $35 a share in June 2021, and its share prices more than doubled to a record high of $76.30 that November. Twilio went public at $15 in June 2016, and the share price skyrocketed to its all-time high of $443.49 in February 2021.
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But as of this writing, SentinelOne's stock only trades at about $14, while Twilio is worth just over $60 per share. The bulls retreated from both stocks as their sales growth cooled off in a tougher macro environment. Rising interest rates also weighed on their bubbly valuations.
Can either of these out-of-favor growth stocks bounce back in the near future?
Different business models, similar macro challenges
SentinelOne's revenue soared 120% in fiscal 2022 (which ended in January 2022) and jumped 106% to $422 million in fiscal 2023. Its total number of customers grew 70% in fiscal 2022 and another 50% to over 10,000 in fiscal 2023, while its dollar-based net revenue retention rate -- which gauges its year-over-year growth per existing customer -- stayed near 130%.
Those growth rates are stunning, but SentinelOne anticipates a slowdown, with just a 40%-42% revenue increase in fiscal 2024. It attributes that deceleration to macro headwinds, which are forcing many companies to rein in their software spending. The broader cybersecurity market might be resistant to economic downturns -- companies usually won't lower their digital defenses to save a few dollars -- but it's still tough to gain new customers in this challenging environment.
Twilio's revenue rose 61% in 2021 but only climbed 35% to $3.83 billion in 2022. Its dollar-based net expansion rate declined from 131% in 2021 to 121% in 2022.
Back in 2020, Twilio told investors it could grow its organic revenue by at least 30% annually through 2024. But it withdrew that guidance last November, and analysts expect its revenue to only rise 7% in 2023. Just like SentinelOne, Twilio blamed that slowdown on macro headwinds that caused developers to tether fewer apps to its cloud platform.
Neither company can generate consistent profits
SentinelOne and Twilio are both unprofitable on a generally accepted accounting principles (GAAP) basis, and all that red ink drove away the bulls over the past year as rising interest rates made investors wary of unprofitable companies.
Both companies were also unprofitable in their latest fiscal years on a non-GAAP basis, which excludes stock-based compensation and other one-time expenses. However, analysts expect Twilio to return to profitability on a non-GAAP basis in 2023 as it reins in its spending. Those cost-cutting efforts might just help Twilio counter the impact of high carrier fees (which American telecom companies now charge whenever third-party apps access their networks) on its gross margins.
Analysts expect SentinelOne to narrow its non-GAAP net loss this year, but it will likely stay unprofitable for the foreseeable future. That's worrisome because its larger competitors -- including CrowdStrike and Palo Alto Networks -- are both operating at much higher margins. Therefore, it could be difficult for SentinelOne to grow to the point that economies of scale kick in and enable it to generate stable non-GAAP and GAAP profits.
The valuations and verdict
With an enterprise value of $3.5 billion, SentinelOne trades at about 6 times this year's sales. That makes it seem cheaper than CrowdStrike or Palo Alto, which both trade at 11 times this year's sales. But SentinelOne also faces tougher questions about its margins and profitability than those two larger (and more diversified) competitors.
Twilio's enterprise value of $8.5 billion is just over 2 times higher than its projected revenue for 2023. That makes it dirt cheap relative to other cloud software stocks, but that low valuation also clearly reflects its near-term challenges.
I'm not too bullish on either of these stocks right now. But if I had to pick one over the other, I'd stick with Twilio because it has clearer competitive advantages, its profits are more stable, and its stock is a lot cheaper. SentinelOne could still have plenty of room to run, but it still has to prove it can manage in a down economy before I consider its business model to be sustainable.
