SentinelOne (S +1.08%) eclipsed CrowdStrike as the most valuable cybersecurity IPO when it went public in June 2021. But today, SentinelOne trades more than 50% below its IPO price and is worth 90% less than CrowdStrike.
SentinelOne lost its luster as its revenue growth cooled off, it stayed deeply unprofitable, and rising interest rates popped its bubbly valuation. Yet the bulls still claim its AI-driven automated approach to cybersecurity -- which cuts human analysts out of the loop -- will permanently change the way companies shore up their digital defenses.
I recently weighed the bull and bear cases for SentinelOne, and I said it still wasn't a compelling investment in this challenging market. Today, I'll review two other recent developments that can be considered a green flag and a red flag for its future.
Image source: Getty Images.
The green flag: An expanded partnership with Mandiant
Back in February 2022, the cybersecurity company Mandiant (formerly known as FireEye) integrated SentinelOne's Singularity XDR (extended threat detection and response) platform into its own Advantage XDR platform. Alphabet's (GOOG +1.64%) (GOOGL +1.75%) Google subsequently acquired Mandiant in September 2022 and integrated its cybersecurity services into its Google Cloud Platform (GCP).
That's why it wasn't surprising when SentinelOne and Mandiant recently expanded that partnership with a new deal that will enable SentinelOne to integrate Mandiant's threat-detection services into its own Singularity XDR platform. That deal should further strengthen SentinelOne's ties with Google -- and potentially make it a compelling takeover target for Google if it wants to expand its cybersecurity ecosystem again.
But before investors get too excited about that deal, they should recall that Mandiant was an underdog that had struggled for years before it was finally acquired by Google, and that Google itself is still a distant third-place contender in the cloud platform race. In other words, this expanded partnership probably won't move the needle for either company anytime soon.
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The red flag: Its alleged talks with Cisco
In late August, SentinelOne's stock briefly surged amid reports that it might sell itself. However, it quickly shot down those rumors and claimed it wasn't for sale.
Yet several recent reports claimed Cisco Systems (CSCO +0.47%) -- which just agreed to acquire Splunk for $28 billion -- had considered buying SentinelOne but backed out amid concerns regarding the way it reported its annual recurring revenue (ARR). In response, SentinelOne said it had "never engaged in due diligence concerning a potential acquisition" by Cisco, and that the recent rumors were all "lies" that were being spread by its "desperate competitors."
But back in early June, SentinelOne unexpectedly revised the way it reported its ARR to account for a "change in methodology and correction of historical inaccuracies." That change notably shaved 5 percentage points off its year-over-year ARR growth (from 80% to 75%) in the first quarter of fiscal 2024 (which ended on April 30).
That revision supports the idea that SentinelOne was trying to sell itself and Cisco backed out due to accounting issues. That's all speculation for now, but these recent events could drive the bears to closely scrutinize the way SentinelOne reports its ARR.
I'm still staying away from SentinelOne
SentinelOne continues to grow like a weed. Its revenue more than doubled in each of the past three fiscal years and it expects 43% growth in fiscal 2024. Its adjusted gross and operating margins are also gradually improving. With an enterprise value of $4 billion, its stock looks reasonably valued at 7 times this year's sales.
Yet SentinelOne is also nowhere close to breaking even based on either generally accepted accounting principles (GAAP) or non-GAAP terms. It also faces intense competition from larger, better diversified, and more profitable cybersecurity giants like CrowdStrike, Palo Alto Networks, and Fortinet.
Investors would be better off sticking with those stalwarts than taking a chance on SentinelOne, which could be weighed down by concerns about its slowing sales growth, lack of profits, and past accounting errors.
