SentinelOne (S 1.70%) posted its latest earnings report on Aug. 31. For the second quarter of its fiscal 2024, which ended on July 31, the cybersecurity company's revenue rose 46% year over year to $149 million and exceeded analysts' estimates by $8 million. Meanwhile, its adjusted net loss narrowed from $56 million to $25 million, or $0.08 per share, clearing the consensus forecast by six cents.
SentinelOne's stock rose 3% after that report, but it remains more than 50% below its IPO price of $35. Let's review five reasons to buy this out-of-favor stock, as well as three reasons to sell it, to see if it's a worthwhile investment.
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The five reasons to buy SentinelOne
The bulls love SentinelOne for five reasons: Its business model is disruptive, it's growing rapidly, its margins are expanding, its stock seems undervalued, and it recently shot down the buyout rumors by declaring it would remain independent.
SentinelOne's Singularity XDR (extended detection and response) platform differentiates the company from its competitors by cutting humans out of the loop. It automates its entire threat detection and response process with AI algorithms, which it claims are faster, more efficient, and more accurate than human analysts.
SentinelOne's growth rates support those bold and disruptive claims. Its revenue more than doubled in each of the past three fiscal years, and rose another 56% year over year in the first half of fiscal 2024. It continued to expand even as the macro headwinds drove many companies to rein in their software spending over the past year.
Margins are also improving. Its adjusted gross margin expanded from 58% in fiscal 2021 to 72% in fiscal 2023, and it expects that figure to rise to 76% in fiscal 2024. Its adjusted operating margin improved from negative 107% in fiscal 2021 to negative 49% in fiscal 2023, and it expects to post a negative adjusted operating margin of 25% in fiscal 2024.
For the full year, the company expects revenue to rise 43% to $605 million. With an enterprise value (EV) of $4.25 billion, it trades at just seven times that forecast. That EV/Revenue ratio makes it undervalued relative to its peers with similar growth rates. For reference, the cloud-based cybersecurity company Zscaler -- which is expected to grow its revenue by 46% this year -- still trades at 14 times that estimate.
Lastly, SentinelOne's decision to remain independent might disappoint short-term traders who were looking for a quick profit, but it's a bullish sign because it implies its management is still confident in its long-term growth potential. That's probably why its insiders bought nearly twice as many shares as they sold over the past 12 months.
The three reasons to sell SentinelOne
The bears expect SentinelOne's stock to head lower for three reasons: Its growth is still cooling off, it's racking up steep losses on a generally accepted accounting principles (GAAP) basis, and the competition could prevent it from ever breaking even.
SentinelOne initially dazzled investors with its triple-digit revenue growth, but it's losing its momentum this year and analysts expect its revenue to only rise 32% in fiscal 2025 and 31% in fiscal 2026. We should take those estimates with a grain of salt, but that slowdown would make it comparable to its much larger competitor CrowdStrike, which expects to generate approximately five times as much revenue as SentinelOne in its current fiscal year.
On a GAAP basis, SentinelOne's net loss widened year over year from $186 million to $196 million in the first half of fiscal 2024. Analysts expect it to slightly narrow its net loss from $379 million in fiscal 2023 to $363 million in fiscal 2024, but it's expected to stay unprofitable for the foreseeable future. All that red ink could make it less appealing than cybersecurity leaders like CrowdStrike, Palo Alto Networks, and Fortinet -- which all generated GAAP and non-GAAP profits in their latest quarters -- as long as interest rates stay elevated.
CrowdStrike, Palo Alto, and Fortinet have also been expanding their own AI-driven XDR platforms to challenge SentinelOne. That intensifying competition coincides with the ongoing decline in SentinelOne's dollar-based net revenue retention rate (its year-over-year growth per existing customer), which dropped from 130% in fiscal 2023 to 125% and 115% in the first and second quarters of fiscal 2024, respectively. If its retention rates continue to decline as more competitors creep into its backyard, it could lose its pricing power and any chance of generating consistent profits.
Which argument makes more sense?
SentinelOne is still growing, and its low debt-to-equity ratio of 0.4 and $732 million in cash, cash equivalents, and short-term investments at the end of the second quarter should prevent it from going bankrupt. That said, its slowing growth, declining retention rates, and steep losses will prevent the bulls from rushing back. So for now, I'd avoid SentinelOne -- at least until its non-GAAP operating margin turns positive -- and stick with more reliable plays like CrowdStrike, Palo Alto, and Fortinet.
