Cybersecurity company SentinelOne (S +3.69%) was one of Wall Street's hottest tickets when the stock went public in the summer of 2021.
But a bear market took shares down a notch. Today, shares are down more than 75% from their high after earnings missteps and rumors about the company's future.
Fortunately, the company has seemingly punched back; recent second-quarter earnings improved notably. However, investors should consider one big catch before buying shares.
SentinelOne bounces back in Q2
Earnings for Q1 fiscal 2024 (ending April 30, 2023) were rough for SentinelOne. The company, which uses artificial intelligence to hunt for potential cyber threats and breaches, had a few red flags in its report. First, it disclosed that it had improperly recorded revenue for some transactions, such as renewals and product upsells.
These types of issues are never a good look for a public company. Additionally, management notably reduced its guidance for the year (fiscal year 2024). The company lowered its 2024 guidance from a range of $631 million and $640 million to a range of $590 million to $600 million.
Q2 earnings were a significant improvement. The company beat top- and bottom-line analyst estimates, clarified that the accounting issues were resolved, and revised full-year guidance to $605 million. This type of quarter could restore some investor confidence in management.
Putting rumors to rest
Just weeks ago, rumors began swirling that SentinelOne was trying to sell itself. Reuters reported that SentinelOne had hired an investment bank to advise on discussions with potential acquirers. Additionally, a spokesperson for privately held Wiz indicated that the cybersecurity company was considering a bid for SentinelOne. Days later, Reuters reported again that the two sides had canceled a partnership.
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Key Data Points
Admittedly, that's quite a bit of smoke for there not to be fire. It only added to the stock's volatility heading into earnings as the market began factoring a potential sale into SentinelOne's share price.
However, CEO Tomer Weingarten was very vocal about these rumors on the company's recent earnings call. Specifically, he noted the company's goals and stated that he believed operating as a public, independent, and transparent company was the best way to accomplish those goals. Additionally, he noted that SentinelOne and Wiz had terminated a reselling agreement, but that the collaboration partnership between the two was still unchanged.
The door isn't entirely closed
Assuming that's the end of the discussion, SentinelOne's quarter could go a long way in luring back long-term investors who thought the company may have hit some hurdles. However, there is more to this story.
SentinelOne's shareholder structure consists of A and B shares. B shares, which come with voting rights, are largely held by two large venture capital firms that invested privately in SentinelOne earlier in the company's life. Those two companies have approximately 70% of the voting power, meaning they could force a sale if push came to shove.
Again, it's great to hear the company's intentions straight from Weingarten, but ultimately, he doesn't have the final say over the company's fate. Investors shouldn't avoid the stock due to worries about a potential sale; after all, almost any company can get acquired at any time. Instead, keep it in the back of your mind.
What should investors do?
SentinelOne's strong quarter should help rebuild confidence that the business is heading in the right direction. That's what investors should ultimately base their investment decisions on -- operating performance. After all, any sale would likely come at a premium to the stock's market share price, so investors may get a bump if a deal ever materializes.
Until then, SentinelOne continues to perform as an independent company and is a stellar cybersecurity stock worth considering for your portfolio.
