Is It Too Late to Buy SentinelOne Stock?

SentinelOne's (S 1.70%) stock surged 16% on Aug. 21 amid reports that the cybersecurity company might sell itself. It went public at $35 in June 2021, and more than doubled to its all-time high of $76.30 five months later, but now trades at $16.

SentinelOne initially dazzled the market with its deployment of artificial intelligence (AI) algorithms instead of human analysts to contain threats. It claims that automated approach makes it faster, more accurate, and more cost-efficient than other cybersecurity platforms. Its growth rates supported that thesis: Its revenue more than doubled in each of the past three fiscal years.

Image source: Getty Images.

Unfortunately, the bulls eventually lost interest in SentinelOne as its growth cooled off, it racked up steep losses, and rising interest rates popped its bubbly valuations. A recent change to the way it reports its annual recurring revenue (ARR) to correct some "historical inaccuracies" raises additional red flags regarding its accounting methods.

Faced with all these problems, it might seem like it's too late to buy SentinelOne's stock, even if a suitor eventually emerges and offers to take it over at a slight premium. Let's see if there's any hope left for this fallen hypergrowth stock.

Why is SentinelOne struggling to stay afloat?

SentinelOne grew like a weed over the past three fiscal years. However, its growth in revenues, ARR, and high-value customers that generate more than $100,000 in ARR all decelerated in fiscal 2023 (which ended this January) and the first quarter of fiscal 2024. Its dollar-based net revenue retention rate also stopped expanding.

Data source: SentinelOne. *Not disclosed.

It expects that slowdown to deepen with just 40% to 42% revenue growth in fiscal 2024. Analysts expect its revenue to rise 41% this year, and 32% to $783 million in fiscal 2025. It mainly blames that deceleration on the macro headwinds, which made it tougher to acquire new customers while driving many companies to rein in the software spending.

But competition from larger peers could also be generating fiercer headwinds. CrowdStrike has been integrating AI-powered cybersecurity services into its cloud-native ecosystem, while Palo Alto Networks has been expanding its Cortex ecosystem of AI-powered threat detection tools.

SentinelOne's gross and operating margins are gradually improving, but it will likely remain unprofitable by both generally accepted accounting principles (GAAP) and non-GAAP measures for the foreseeable future. All that red ink made it less appealing than larger companies like Palo Alto, which are already profitable by GAAP measures.

The other big problem for SentinelOne was its valuation. At its all-time high in late 2021, its enterprise value soared to $18.7 billion -- or 44 times the revenue it would actually generate in fiscal 2023. At its current enterprise value of $4.2 billion, SentinelOne looks more reasonably valued at just 5 times its estimated sales for fiscal 2025.

Could SentinelOne be acquired?

SentinelOne hasn't said anything about selling itself, and the recent rumors merely suggest it's brought in the investment bank Qatalyst Partners to explore a potential deal. There's no news about an actual valuation or any potential suitors -- so investors shouldn't buy SentinelOne in hopes of a quick buyout.

But with its rapid revenue growth and no debt on its balance sheet, SentinelOne could still be an appealing takeover target for bigger cybersecurity companies like Palo Alto Networks, which are developing more AI tools, or tech giants like Microsoft, which are beefing up their own cybersecurity ecosystems. Private equity firms like Advent International and Thoma Bravo have also been scooping up a lot of smaller cybersecurity companies in recent years.

Nevertheless, the costs of integrating SentinelOne's unprofitable business could overshadow a lot of those synergies. Its potential suitors could also simply wait for SentinelOne's stock to slide even further to buy it at a steeper discount.

Is it too late to buy SentinelOne's stock?

SentinelOne's stock was briefly boosted by the buyout rumors, but I don't expect that rally to be sustainable. It makes more sense to stick with profitable leaders like Palo Alto, Fortinet, and CrowdStrike in this wobbly market instead of smaller, speculative, and unprofitable players like SentinelOne. SentinelOne might eventually be bought out, but I think it's too late to bet on it as a long-term investment.