SentinelOne (S +3.69%) attracted a lot of attention when it went public two years ago. The cybersecurity company declared that its Singularity extended detection and response (XDR) offering could replace human analysts with automated AI algorithms, which were faster, more efficient, and less prone to make mistakes.
Its explosive growth rates supported those bullish claims. Its revenue soared 120% in fiscal 2022 (which ended in Jan. 2022) and jumped another 106% to $422 million in fiscal 2023. Its total number of customers expanded by 70% in fiscal 2022 and climbed 50% to exceed 10,000 the following year, all while its dollar-based net revenue retention rate -- which gauges its year-over-year growth per existing customer -- stayed near 130%.
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But with an enterprise value of $3.5 billion, SentinelOne is still tiny compared to Palo Alto Networks (PANW +7.00%) -- the $75.7 billion cybersecurity giant that is often considered a bellwether of the entire sector. Could SentinelOne continue to expand and join the same large-cap league as Palo Alto Networks over the next decade?
Can SentinelOne maintain its momentum?
SentinelOne's triple-digit revenue growth initially dazzled the bulls, but it only expects 40% to 42% growth in fiscal 2024. It blames that slowdown on macro headwinds, which are forcing companies to rein in their spending on new software deals.
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Key Data Points
Looking further ahead, analysts expect its revenue to grow at a more moderate compound annual growth rate (CAGR) of 35% from fiscal 2023 through fiscal 2026. If it meets those estimates -- which we should certainly take with a grain of salt -- SentinelOne could generate $1.03 billion in revenues by the final year.
That would make SentinelOne in fiscal 2026 comparable to Palo Alto Networks in fiscal 2015 (ended July 2015), when the company only generated $928 million in revenue. Over the following seven years, Palo Alto grew its revenue at a CAGR of 29% and generated $5.5 billion of revenue in fiscal 2022. If SentinelOne meets analysts' revenue expectations for fiscal 2026 and continues to grow at a CAGR of 30% over the following seven years, it could generate $6.5 billion in revenue by fiscal 2033 -- which would finally make it larger than today's Palo Alto Networks.
SentinelOne and Palo Alto both provide a diverse mix of cloud-based services and on-site appliances, but only SentinelOne is going all-in on the AI market. Palo Alto's Cortex platform provides AI-powered threat detection services, but its other two platforms -- Prisma for its cloud-based security services and Strata for its on-site firewalls -- both still rely on teams of human analysts. SentinelOne believes its Singularity XDR platform will largely automate the entire threat containment process.
Therefore, SentinelOne can be considered a long-term play on both the cybersecurity and AI markets. The maturing cybersecurity market might only grow at a CAGR of 14% from 2023 to 2030, according to Fortune Business Insights, but Grand View Research still expects the nascent AI market to expand at a CAGR of 37% from 2023 to 2030.
Can SentinelOne scale up its business?
SentinelOne might have a clear path toward growing its revenue, but it's still deeply unprofitable by both generally accepted accounting principles (GAAP) and non-GAAP measures. It incurred a GAAP net loss of $379 million in fiscal 2023, and analysts only expect it to slightly narrow its annual net loss to $235 million by fiscal 2026.
Palo Alto posted a lighter GAAP net loss of $165 million back in fiscal 2015, but its annual net loss actually widened to $267 million in fiscal 2022 as it ramped up its investments and integrated some acquisitions. However, Palo Alto has also been consistently profitable on a GAAP basis over the past four quarters -- and analysts expect its bottom line to stay in the black for the foreseeable future. Therefore, SentinelOne might seem hopelessly unprofitable right now, but economies of scale could kick in as they did for Palo Alto and stabilize its long-term profit growth.
That outlook seems promising, but investors should note that SentinelOne's gross margin of 66% in fiscal 2023 was lower than Palo Alto's gross margin of 73% back in fiscal 2015. Palo Alto's gross margin was actually compressed to just 69% in fiscal 2022 as it expanded its ecosystem, so SentinelOne might experience a similar compression as it expands Singularity's XDR platform with new features. If that happens, it could be a bit tougher for SentinelOne to achieve GAAP profitability.
So could SentinelOne become the next Palo Alto Networks?
Today's SentinelOne bears some striking similarities to Palo Alto Networks in 2015. If SentinelOne continues to expand its AI-powered platform with the same shrewdness and confidence that Palo Alto Networks expanded its ecosystem beyond next-gen firewalls with AI and cloud-based tools, it does have the potential to join the same weight class within the next 10 years.
