SentinelOne (S 1.70%) went public in June 2021 and has seen turbulent trading since its debut. While the cybersecurity company's share price initially rocketed higher, the stock is currently down roughly 61% from where it closed on the day of its initial public offering.
Is the stock a smart buy for growth investors right now, or is there still too much downside risk? If you're thinking about investing in SentinelOne, or already own the stock in your portfolio, read on for a look at bullish and bearish dynamics that could be pivotal factors in shaping the stock's performance.
Bull case: Healthy business momentum and long-term demand tailwinds
SentinelOne stock suffered a huge sell-off in June after the company cut its sales forecast for this year to between $590 million and $600 million, down from its previous guidance for revenue of between $631 million and $640 million. Given the current macroeconomic uncertainties, many businesses have made moves to curtail spending and delayed growth initiatives. But despite a disappointing forecast adjustment in the face of those macro pressures, the cybersecurity specialist's business should still expand at a healthy pace.
SentinelOne grew revenue by 70% year over year to $133.4 million in the first quarter of its current fiscal year, which ended April 30. Annualized recurring revenue grew 75% to $563.6 million, and the company continued to attract new customers and see increased spending from its established clients.
At the midpoint of its sales target for this year, the company's updated guidance anticipates growth of roughly 41%. That's down from its previous midpoint of 50.5% sales growth, but it's still a healthy rate of expansion. Additionally, management's new target could wind up being conservative. While the macroeconomic outlook is still unclear, inflation has cooled (and continues to) and economists have come to view a recession in the near term as less likely.
Looking further down the road, SentinelOne should benefit from secular growth trends in the cybersecurity industry. The number of cyberattacks will only continue to increase, and the monetary and reputational risks posed by successful breaches are significant. So while macroeconomic pressures are currently curbing SentinelOne's growth, the long-term demand outlook for its services remains quite favorable.
Bear case: Growth-dependent valuation and tough competition
SentinelOne has gained market share, but it's not the only big player in endpoint and cloud workload cybersecurity services. CrowdStrike stands as the leader in endpoint cybersecurity services and has been growing its market share.
While CrowdStrike has mostly focused on providing services to large enterprises, it plans to devote more resources to addressing the needs of small and medium-sized businesses, a category that accounts for a substantial portion of SentinelOne's clientele. Additionally, CrowdStrike's total addressable market forecast suggests that it plans to devote more resources to building its business in the cloud workloads category.
Further complicating the competitive picture, Microsoft is also making a big push into cybersecurity services. The tech giant aims to make cybersecurity one of its next key growth drivers, and its strong positions in cloud infrastructure services, enterprise software, and other categories give it strong foundations that could help it win customers at a rapid clip.
Unlike CrowdStrike and Microsoft, SentinelOne isn't profitable yet. For the fiscal year, the upstart cybersecurity player expects its adjusted operating margin will land between negative 25% and negative 29%, and it could be years before the business delivers profits on an adjusted basis.
With a market cap of roughly $4.8 billion, the company is valued at roughly 8 times this year's expected sales. Even on the heels of a big pullback, that valuation still presents significant downside potential.
Is SentinelOne stock a buy?
SentinelOne isn't a low-risk stock. While its gross margins are on track to improve significantly this year and the company is increasing sales at an impressive pace, its heavily growth-dependent valuation sets the stage for poor stock performance if business results come in below expectations or if broader macroeconomic conditions worsen. Accordingly, it probably wouldn't be a great pick for investors without an above-average tolerance for risk.
That said, the company is growing sales at an encouraging pace even in the face of macroeconomic headwinds, and the cybersecurity services industry looks poised for huge growth over the long term. While SentinelOne's growth-dependent valuation gives the stock an elevated risk profile now, it could deliver explosive returns for long-term investors.
