This Trend Could Crush the Hopes of Long-Term Investors

The stock market opened the new week on a generally positive note, with the biggest gains reserved for the Nasdaq Composite (^IXIC 2.02%). The S&P 500 (^GSPC 1.02%) also moved higher, but the Dow Jones Industrial Average (^DJI 0.40%) lagged because of its exposure to weaker consumer staples stocks and other sectors that missed the day's rally.

Data source: Yahoo! Finance.

Yet it's important not to put too much weight on a single day's trading activity, whether you're talking about a stock market index or an individual company. Indeed, although shareholders in SentinelOne (S 1.70%) might have been pleased to see a big gain on Monday, they might not be too thrilled at the reason for the move higher -- and they might end up feeling as though they were unable to unlock the full potential of the cybersecurity company.

Looking at strategic options

Shares of SentinelOne were up 16% on Monday. At first glance, it might have appeared as though the company had moved higher in sympathy with industry peer Palo Alto Networks (PANW 0.91%), which also finished the day with a sizable gain after reporting quarterly financial results right before the weekend began on Friday afternoon.

However, the more likely reason for the rise was a report from Reuters that suggested that the cybersecurity company might be looking for a potential buyer. According to the report, SentinelOne has been exploring various strategic options, one of which might be to sell the company outright to any interested party. According to the sources that Reuters cited, SentinelOne had hired an investment banking company to advise it on entering into discussions with would-be acquirers with interest in the cybersecurity specialist.

Obviously, just because a stock rises on reports of a possible sale doesn't mean that a sale will eventually end up taking place. Moreover, Reuters didn't suggest that any firm price for SentinelOne had been discussed, or that SentinelOne itself had specific expectations for how high an offer would need to be before the company would consider accepting it.

When long-time shareholders lose out

The reason for the jump on Monday is that investors expect that if an acquisition bid does come, it will likely be at a premium to the current price. Indeed, in many cases, the eventual offer price ends up being even higher than where the stock price climbs on initial rumors of a possible buyout.

Yet those who invested in the cybersecurity company at or shortly after its initial public offering would likely still end up disappointed, even at a sweetened offer for SentinelOne. When the company came public in 2021, its IPO price was set to imply a valuation of nearly $9 billion. Even after today's gains, SentinelOne's market capitalization has fallen to just $4.9 billion. So that would leave early investors looking at losses even if an eventual bid comes at a higher price.

Even worse, an all-cash offer to take SentinelOne private would make it impossible for investors to retain their interest in the company. Even if a deal involved accepting publicly traded stock of an acquirer in exchange for SentinelOne shares, continuing investors would have to take exposure from the acquirer's pre-existing business in addition to the new SentinelOne business.

When stocks fall to bargain-basement prices, it can be a good opportunity. Unfortunately, institutional investors look for situations like that on which to capitalize. Sometimes, they can end up the big winners, leaving longer-term investors suffering big losses without hanging on to the eventual upside.