Cybersecurity specialist SentinelOne (S +1.57%) has delivered remarkable gains of 86% in the past year, which means that investors who bought this stock a year ago have seen their investments increase substantially in a short period.
But what if you're one of those who missed buying this high-flying growth stock before its tremendous rally began? SentinelOne currently trades at 15 times sales following its red-hot rally. That makes the stock richly valued, considering that the S&P 500 index sports an average price-to-sales multiple of 2.7.
However, a closer look at the company's impressive pace of growth and solid catalysts will tell us that it can justify its valuation and deliver more upside in the long run. Here's why.
NYSE: S
Key Data Points
All set to capitalize on a hot tech trend
When SentinelOne released fiscal 2024 third-quarter results (for the three months ended Oct. 31, 2023) in December 2023, the company reported a big increase in revenue, a sharp decline in its loss per share, and also raised its full-year outlook.
More specifically, SentinelOne's revenue was up 42% year over year to $164 million during the quarter. Its non-GAAP net loss shrunk to just $0.03 per share from $0.16 per share in the year-ago quarter. The numbers exceeded consensus estimates of a $0.08 per share loss on revenue of $156 million.
Even better, SentinelOne has raised its full-year revenue guidance to $616 million from its earlier estimate of $605 million. The updated guidance suggests that the company's revenue increased 46% from fiscal 2023's reading of $422 million. The better-than-expected results and the upgraded guidance can be attributed to the healthy growth in the company's customer count, as well as higher customer spending.
SentinelOne's overall customer count increased 28% year over year in fiscal Q3 to 11,500. More importantly, the number of customers with annualized recurring revenue (ARR) of more than $100,000 increased at a faster pace of 33% to 1,060. The company points out that ARR refers to "the annualized revenue run rate of our subscription and capacity contracts at the end of a reporting period."
The faster growth in this metric points toward SentinelOne's "ability to acquire new subscription and capacity customers and to maintain and expand our relationship with existing customers," in the company's own words. It is worth noting that SentinelOne credits the strong demand for its AI-powered security solution for the robust growth it is witnessing.
In April 2023, SentinelOne announced Purple AI to help organizations improve the efficiency of their cybersecurity teams. The company points out that this generative AI cybersecurity assistant "enhances investigations, simplifies threat hunting, makes recommendations, and automates actions. In essence, it supercharges every stock and data analyst, unlocking efficiency and accelerating response to us."
The rollout of this product has already begun, and SentinelOne plans to make this AI-powered cybersecurity tool generally available to customers from the current quarter. Not surprisingly, financial services firm BTIG predicts that SentinelOne has the ability to gain more market share in the cybersecurity space thanks to its new products, including Purple AI.
BTIG analyst Gray Powell raised his SentinelOne rating to buy from neutral last month, estimating that the company can outperform Wall Street's expectations in the future. Moreover, the growing adoption of generative AI in the cybersecurity space should open a long-term growth opportunity for SentinelOne. That's because generative AI-focused cybersecurity spending is expected to jump from just $9 million in 2022 to almost $14 billion in 2032, according to Bloomberg Intelligence.
This explains why analysts are anticipating its bottom line to increase at a compound annual growth rate (CAGR) of 40% for the next five years. That could translate into a higher stock price.
More stock price upside could be ahead
SentinelOne is expected to become profitable on a non-GAAP basis in the new fiscal year following fiscal 2024's estimated loss of $0.29 per share. This is evident from the chart below:
S EPS Estimates for Current Fiscal Year data by YCharts
The above chart also tells us that SentinelOne's earnings growth could accelerate rapidly next year. So it won't be surprising to see this cybersecurity company indeed delivering the healthy long-term growth that Wall Street is expecting from it.
Also, SentinelOne's revenue could cross the $1 billion mark in a couple of years. That would indicate 30%-plus sales growth over that period. The long-term opportunity in the generative AI cybersecurity space suggests that it can sustain that momentum for a longer time.
Assuming SentinelOne does hit $1 billion in revenue in fiscal 2026 and maintains its current sales multiple of 15, its market capitalization could increase to $15 billion. That would be a jump of 73% from current levels in a couple of years. So investors looking to buy an AI stock that's benefiting from the adoption of this technology in the cybersecurity market may want to take a closer look at SentinelOne now.
