SentinelOne (S 1.70%) went public at a valuation of $8.9 billion just over two years ago, making it the highest-valued cybersecurity IPO ever. Its market cap then swelled to $20.3 billion at the peak of the growth stock rally in November 2021.
Yet SentinelOne is only worth $4.5 billion today.
This red-hot tech stock fizzled out as its sales growth slowed down, it racked up steep losses, and rising interest rates popped its bubbly valuations. Some investors might be tempted to buy SentinelOne at this steep discount to its IPO price, but there are at least three red flags that might limit its near-term gains.
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1. CrowdStrike strikes back at SentinelOne's challenge
Ever since its public debut, SentinelOne has been frequently compared to CrowdStrike (CRWD 2.03%). Just as CrowdStrike dazzled the market with its cloud-native cybersecurity services which don't require any on-site appliances, SentinelOne impressed investors with its artificial intelligence (AI)-powered extended detection and response (XDR) Singularity platform which automates the threat detection process and eliminates the need for human analysts.
SentinelOne even created a website that touts its strengths against CrowdStrike, claiming that "human-powered security is the past" and the "future is autonomous." In response, CrowdStrike launched its own website which slammed SentinelOne for selling a "point product that's hard to deploy, impossible to manage, and relies on black-box automation for protection." CrowdStrike also claims that SentinelOne's "over-reliance on autonomous capabilities results in false positives."
Instead of completely replacing human analysts with AI bots, CrowdStrike is upgrading its cloud-native Falcon platform with local agent AI detections, cloud-based behavioral AI detections, and AI-alerted indicators which make it easier for its analysts to spot and contain threats. It also recently launched a generative AI chatbot called Charlotte which makes it easier for users of all technical expertise levels to manage its tools with natural language prompts.
CrowdStrike generates roughly five times as much as revenue as SentinelOne, it has higher gross margins, and it's more profitable. Therefore, SentinelOne's decision to directly challenge CrowdStrike could backfire as its larger rival strikes back.
2. Microsoft expands its own cybersecurity ecosystem
Looking ahead, SentinelOne and CrowdStrike might face a mutual threat: Microsoft's (MSFT 1.82%) expansion of its own security division. Microsoft already bundles its own Defender antivirus software into Windows, and it also provides the service as a stand-alone app for iOS and Android devices. But it has grander long-term ambitions for the cybersecurity market, since it can easily bundle additional security services into Windows, Office, and its Azure cloud infrastructure platform.
Back in 2021, Microsoft said it would invest $20 billion into its cybersecurity business over the following five years. That's why it acquired a long list of smaller cybersecurity companies -- including RiskIQ, Miburo, and CyberX -- and recently expanded into the network security market with its Entra family of identity and network access services.
All of those moves, along with Microsoft's massive investments in ChatGPT's creator OpenAI, suggest the tech giant could eventually merge its cloud, AI, and cybersecurity ecosystems to drive third-party cybersecurity companies out of its first-party ecosystem. SentinelOne could be more exposed to that seismic shift than its larger and more profitable peers.
3. SentinelOne has cooling growth and red ink
SentinelOne's revenue more than doubled in each of its past three fiscal years. But for fiscal 2024 (which will end next January), it only expects 40%-42% growth. Analysts expect its revenue to rise 41% this fiscal year and 33% to $794 million in fiscal 2025. By comparison, analysts expect CrowdStrike's revenue to rise 35% in fiscal 2024 (which also ends next January) and grow 29% to $3.9 billion in fiscal 2025. We should take those estimates with a grain of salt, but it's generally a bright red flag when an underdog is only growing its revenue at a comparable rate as a market leader.
SentinelOne's slowdown might not be too worrisome if it were generating stable profits. But the company is still deeply unprofitable by both generally accepted accounting principles (GAAP) and non-GAAP measures -- so it could struggle to keep pace with its larger competitors while operating a sustainable business model. Analysts expect it to only slightly narrow its GAAP loss from $379 million in fiscal 2023 to $371 million in fiscal 2024. That slowing growth and red ink could keep the bulls at bay -- even as they warm up to market leaders like CrowdStrike and Palo Alto Networks (PANW 0.91%) again.
It's not the right time to buy SentinelOne stock yet
SentinelOne could eventually grow into a much larger cybersecurity company if it plays its cards right, but it hasn't proven that its business model is sustainable yet. It also doesn't look particularly cheap right now at 7 times this year's sales -- so investors shouldn't load up on this speculative stock until a few more green shoots appear.
