The past year has been a terrible one for SentinelOne (S +5.19%) investors. Shares of the cybersecurity provider have fallen 17% even as the company has grown at a breathtaking pace. But this could be an opportunity for savvy investors to buy a potential artificial intelligence (AI) winner at a relatively attractive valuation.
One of the reasons SentinelOne has struggled is because of the massive beating it took in June after missing Wall Street's quarterly targets. The company blamed a slowdown in spending by customers owing to macroeconomic challenges. However, results for the second quarter of fiscal 2024 (ended July 31, 2023) indicate that things may slowly be getting better thanks to the growing adoption of its AI-driven cybersecurity offerings.
Let's look at some reasons why buying SentinelOne stock right now might turn out to be a smart long-term move.
NYSE: S
Key Data Points
It's growing impressively despite headwinds
SentinelOne's fiscal Q2 revenue increased 46% year over year to $149 million, which was well ahead of the $141.5 million consensus estimate. The cybersecurity specialist's adjusted net loss narrowed to $0.08 per share from $0.20 per share in the year-ago period, and was much smaller than the $0.14 per share loss that analysts were expecting.
SentinelOne backed up its impressive results with an improved full-year guidance. The company now expects full-year revenue to land at $600 million. It was earlier anticipating full-year revenue to land at $595 million at the midpoint as per the guidance issued in June.
The company's improved showing was driven by an improvement in the customer count, as well as an increase in spending by its clients. SentinelOne's total customer count jumped 30% year over year last quarter to 11,000. Even better, the number of customers with annual recurring revenue (ARR) of $100,000 or more increased at a faster pace of 37% thanks to the adoption of its offerings by bigger customers.
In all, SentinelOne finished the quarter with a 47% year-over-year increase in the ARR to $612 million. SentinelOne's ARR refers to the annualized revenue run rate from its subscription contracts at the end of a period, so the improvement in this metric can be considered a positive for the company's top-line performance going forward. This is reflected in the company's improved revenue guidance for the full year, which would translate into a 43% increase over fiscal 2023.
It is worth noting that SentinelOne finished the previous fiscal year with much stronger revenue growth of 106%. The company hasn't been able to match such impressive growth levels in fiscal 2024 as "enterprises continue to right-size their security investments based on near-term budget constraints," as CEO Tomer Weingarten remarked on the latest earnings conference call.
Even then, SentinelOne's growth has been remarkable. More importantly, the company's price-to-sales ratio has dropped over the past year thanks to the beating that the stock has taken, even though the company has delivered robust top-line growth.
S PS Ratio (Forward) data by YCharts
The stock's slide looks like an opportunity
SentinelOne points out that it is sitting on a massive addressable revenue opportunity worth $100 billion. So the company's full-year revenue forecast suggests that it hasn't tapped even 1% of the end-market opportunity on offer. SentinelOne is taking smart steps to capitalize on this lucrative opportunity by focusing on fast-growing cybersecurity niches such as AI.
In April of this year, SentinelOne introduced Purple AI, a generative AI platform that will allow cybersecurity analysts to hunt for threats, analyze them, and design responses. SentinelOne says that this solution is designed to improve the efficiency of an organization's cybersecurity, as security analysts will be able to use text-based prompts to look for known threats as well as unknown suspicious activity.
SentinelOne will launch Purple AI commercially next year, and it wouldn't be surprising to see this product boost the company's growth. That's because over 70% of organizations are expected to rely on generative AI tools to support their cyber defenses within the next five years, according to market research firm Canalys. What's more, the adoption of generative AI within cybersecurity is expected to increase at an annual rate of 22% over the next decade, generating annual revenue of just over $11 billion by 2032.
All this indicates why SentinelOne is expected to maintain healthy revenue growth over the next couple of years as well.
S Revenue Estimates for Current Fiscal Year data by YCharts
So it would be a good idea for investors to take advantage of the slide in SentinelOne stock as the challenges it is facing right now should be temporary and spending should pick up thanks to technologies such as generative AI. The cybersecurity stock is currently trading at just under 10 times sales as of this writing, and it should be able to justify that valuation considering the potential growth that it is expected to deliver.
