According to consultanting firm McKinsey & Company, cyberattacks will cause a whopping $10.5 trillion worth of damage by 2025 -- yet in 2022, businesses spent only around $168 billion on protection. McKinsey estimates they should be spending $2 trillion right now, which means there's a $1.8 trillion gap in the market, and that's an opportunity for cybersecurity providers.

Modern day threats are highly sophisticated, and they strike within hours, not days or weeks. Therefore, artificial intelligence (AI) now plays a critical role in security software, and SentinelOne (S 3.58%) is a leader in that very space. It has built a portfolio of AI-based products to automate everything from threat hunting to incident response. 

SentinelOne is currently growing its revenue more quickly than some of the biggest names in the cybersecurity industry, yet its stock is down 77% from its all-time high set during the tech frenzy of 2021. Here's why investors might be glad they bought the dip when they look back a few years from now.

Artificial intelligence is transforming cybersecurity

According to cybersecurity provider Palo Alto Networks, 93% of security operations centers still rely on manual processes. Unfortunately, that means 23% of incident alerts are ignored and never investigated, simply because of the substantial workload facing security personnel. To make matters worse, malicious actors are now infiltrating networks and stealing valuable data from businesses within hours, whereas just two years ago, it would take them as long as 44 days.

There is simply no way a team of human security professionals can keep up with the sheer volume of modern-day threats. SentinelOne says more than 26,000 new vulnerabilities were discovered in 2022, and more than 16,000 have already been discovered this year, which means 2023 could see another record high.

Artificial intelligence is the answer to dealing with those challenges. SentinelOne's flagship platform is called Singularity, and it's a full-stack solution for the cloud, the endpoint, and identity protection. It features real-time threat detection and eliminates the need for manual human intervention when an attack occurs. It offers unique tools like one-click rollback, so unauthorized changes to a network can be immediately reversed in the event of a successful breach. 

In April, SentinelOne launched a new tool called Purple AI. It's a chatbot powered by generative AI and large language models, much like OpenAI's ChatGPT, which has received much public attention. Managers can prompt Purple AI to instantly assess their cybersecurity posture, and if a new threat is sweeping the business world, they can ask the chatbot to hunt for signs of it in their own network. 

It's also designed to reduce "alert fatigue," which, as I mentioned, is plaguing security operations personnel. In the event of a security alert, the user can prompt Purple AI to instantly generate a report detailing the incident, saving hours of manual human work. 

SentinelOne is outgrowing many of its peers

Despite the critical need for cybersecurity software, the challenging economic environment has led to a slowdown in corporate spending over the past 12 months. As a result, most providers have experienced slower revenue growth. 

In reporting results for its fiscal 2024 first quarter, ended April 30, SentinelOne told investors it was seeing a reduction in usage and consumption, and that macroeconomic conditions were affecting deal sizes. This prompted the company to drop its full-year revenue forecast from $640 million to $600 million, much to investors' disappointment.

But conditions improved in the second quarter, ended July 31. SentinelOne delivered $149 million in revenue, a 46% year-over-year increase. That beat CrowdStrike's revenue growth of 37% in the same quarter, and Palo Alto Networks' growth of 26%. SentinelOne is a much smaller company than those competitors, which means it can generate higher rates of growth more easily, but the result still points to solid demand and execution.

Speaking of demand, the company saw a 30% increase in the number of customers on its platform. More than 11,000 businesses are now using SentinelOne, 994 of which are spending more than $100,000 per year. That customer cohort grew by a more impressive 37%.

The strong results gave SentinelOne the confidence to increase its fiscal 2024 guidance slightly, to $605 million, after previously reducing it. 

Why SentinelOne stock is a buy now

SentinelOne CEO Tomer Weingarten says the company is targeting a $100 billion addressable opportunity, but that might be understated over the long term, given the aforementioned McKinsey analysis.

The path to what could be a multitrillion-dollar market might be set for an acceleration thanks to new rules that corporate regulators are imposing. In July, for example, the U.S. Securities and Exchange Commission announced that it will require publicly traded companies to announce material cybersecurity incidents within four days. If those companies didn't consider advanced cybersecurity software critical, they will now.

Following the steep 77% sell-off in SentinelOne stock from its all-time high, it's now trading at a price to sales (P/S) ratio of just 10.1. Not only is that near the cheapest valuation since it became a publicly traded company in 2021, but it's also materially cheaper than CrowdStrike stock, which trades at a P/S ratio of 15.5.

CrowdStrike is a larger and more established player in the cybersecurity industry. It generates about five times more revenue than SentinelOne, and it's also a profitable company, which is why investors are willing to pay a premium for its stock. However, as I mentioned, SentinelOne does have an edge when it comes to growth, and it relies on AI just as much as any competitor does, which means it should continue to see strong demand.

For those reasons, I think SentinelOne stock presents an enticing risk-reward proposition at the moment over other stocks in this space. If the company continues to execute, its stock probably won't remain so heavily discounted for long.