Cybersecurity expert SentinelOne (S 1.70%) is an odd duck in this market. Fellow data-security specialists CrowdStrike (CRWD 2.03%) and Palo Alto Networks (PANW 0.91%) are soaring on the wings of a stabilizing economy and surging interest in artificial intelligence (AI). But SentinelOne missed the memo about this sectorwide surge, and its stock price is actually down instead of up in 2023.
Yet, SentinelOne's endpoint protection and identity-authentication solutions are top-notch tools, earning a 98% renewal rate from existing customers and many industry awards. Its Singularity XDR platform is at least comparable to the best CrowdStrike and Palo Alto tools, and arguably superior in some respects.
All things considered, SentinelOne's stock looks spring-loaded for a terrific rebound at some point. Here's what it will take to push SentinelOne past that tipping point.
What does SentinelOne do?
SentinelOne's Singularity system takes automation to the extreme. Installation is quicker and easier than most alternatives. Singularity applies machine learning tools to the active computing environment in order to set up variables and preferences that often take days to tweak by hand. The same AI-driven approach applies to its security features as well, automatically deploying more threat-detection agents in response to newly found attacks or systematic problems.
And the company's focus on AI will only intensify over the next couple of years. Here's how SentinelOne co-founder and CEO Tomer Weingarten explained it at a recent industry conference:
"AI can supercharge you to automate your environment, to a point that maybe we'll get some advantage over the attackers," Weingarten said, "because right now, I'm just reminding everybody the attackers are out-innovating every single company out there today. "Nobody has enough defenses today versus the capabilities that the attackers have now with [large language models, like ChatGPT] and generative AI. And that part is the most dangerous piece of all of cybersecurity."
So SentinelOne stands ready to defend enterprise-class IT environments from increasingly innovative and AI-driven attacks, turning the attackers' own AI powers against them.
I'm not saying that SentinelOne Singularity is the ideal solution for every possible data- and system-security situation, but the company's products deserve a second look from any cybersecurity-minded IT manager.
A painful stock-price cut
As I noted earlier, SentinelOne hasn't kept up with the security market's overall gains this year. The stock is down 2% year to date. CrowdStrike gained 38%, and Palo Alto soared 50% higher over the same period.
The reason behind this stock's disappointing performance is clear. SentinelOne reported solid first-quarter results on June 1, exceeding Wall Street's estimates across the board, but the stock plunged 35% lower that day due to modest guidance for the rest of fiscal year 2024.
The midpoint of management's updated guidance range for the full year called for total sales near $595 million. That's down from approximately $635 million in the original full-year review from March. The expected year-over-year sales growth slowed down from 50% to 40%.
Slowing revenue growth is a cardinal sin for high-octane growth stocks like SentinelOne, whose market value often rests directly on proven and projected revenue growth. The company consistently reports negative-net income, and the company has yet to report positive free cash flow in any fiscal quarter. The lack of cash profits sets SentinelOne apart from the competition, as both CrowdStrike and Palo Alto Networks are veritable cash machines with free-cash-flow margins of 30% or more over the last year.
Embracing SentinelOne's growth philosophy
But here's the thing: SentinelOne is running its business by the classic growth-stock playbook, electing to invest every spare penny in research and development, marketing, and the company's infrastructure rather than collecting profits. Its top-line sales are indeed rising much faster than the competition's, which indicates that things are largely going as planned. SentinelOne is building market share now, saving the focus on profitability for later.
S Revenue (TTM) data by YCharts.
Elsewhere in the same conference presentation, Weingarten explained that his company is pursuing profitable growth in the long run, slowly lifting those negative-profit margins quarter by quarter.
"Everything we're doing is to get to that margin profile where we can get to [economies of scale] and turn to profit later," he said.
And on that note, I see an undervalued growth stock in SentinelOne. The full-year guidance may very well turn out to be overly conservative, and the missing profits will come over time. These developments should give the stock a fresh adrenaline boost, followed by robust rivalry with sector peers like Palo Alto and CrowdStrike.
So the next time I have some spare capital to invest, this stock will be at the top of my list of potential investments. You may want to do the same. I think this AI-driven little security expert is going places.
