Shares of SentinelOne (S 1.70%) fell sharply after the company released fiscal 2024 fourth-quarter results (for the three months ended Jan. 31) on Mar. 13, which may seem a bit surprising, as the cybersecurity specialist not only exceeded Wall Street's expectations, but its guidance was also in line with consensus estimates.
But a closer look at SentinelOne's report will tell us just why investors pressed the panic button, sending the stock down 17% following the Q4 release, and why the dip could be a buying opportunity.
There's a problem with SentinelOne's guidance, but investors shouldn't miss the bigger picture
SentinelOne's fiscal Q4 revenue increased an impressive 38% year over year to $174.2 million, while its adjusted loss per share shrunk to $0.02 from $0.13 in the prior-year period. Analysts were expecting SentinelOne to report a loss of $0.04 per share on $169.4 million in revenue.
For the first quarter of fiscal 2025, SentinelOne has guided for $181 million in revenue, in line with consensus estimates. That would be a 36% improvement from the year-ago quarter. The full-year forecast of $812 million to $818 million, meanwhile, indicates that SentinelOne's revenue could increase 31% at the midpoint. That would be a big step down from the 47% revenue growth the company reported for fiscal 2024.
So even though SentinelOne's quarterly and annual revenue predictions are in line with Wall Street's expectations, this deceleration in growth seems to have investors worried. SentinelOne stock was trading at 14 times sales before the latest earnings release, so it needed to exceed analysts' expectations and deliver strong guidance to support its premium valuation.
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However, SentinelOne seems to have adopted a cautious approach while issuing the guidance. The company is navigating a tight spending environment as customers are placing a "higher emphasis on costs and efficiency." CEO Tomer Weingarten pointed out on the latest earnings call:
The broader demand environment remains similar to the trends that we discussed in prior quarters. Organizations continue to focus on cost and efficiency amid macroeconomic conditions, and we expect these dynamics to persist.
But at the same time, investors should not forget that SentinelOne's revenue pipeline continues to improve. This is evident from the 39% increase in the company's annualized recurring revenue (ARR) to $724.4 million at the end of last quarter.
An improvement in this metric means that SentinelOne's cybersecurity platform is witnessing stronger customer adoption. ARR was also higher than the company's actual revenue, indicating that it's building a robust revenue pipeline for the future.
Strong customer spending on SentinelOne's solutions is also evident from the company's dollar-based net retention rate, which stood at 115% last quarter. This metric compares SentinelOne's ARR from its customer base in the year-ago period to the ARR from the same customer set in the most recent quarter. A reading of more than 100% means its existing customers adopted more of its offerings or increased the usage of existing solutions.
Additionally, SentinelOne is taking steps to ensure it can win a greater share of customers' wallets by introducing more artificial intelligence (AI) tools. AI is the base of the company's Singularity unified cybersecurity platform, which prevents, detects, and responds to threats autonomously.
SentinelOne is now looking to push the envelope further in the AI-powered cybersecurity market with Purple AI, which is a generative AI assistant for enterprises that will help their security analysts tackle threats with greater speed and efficiency. The good part is that Purple AI is already gaining traction among customers. Management pointed out on the earnings call that a demo for the generative AI assistant helped SentinelOne turn "a prospective endpoint customer into a large platform deal."
Not surprisingly, SentinelOne expects Purple AI to drive incremental growth as the year progresses. Given that generative AI-enabled cybersecurity spending is estimated to grow from just $9 million in 2022 to $3.2 billion in 2027 and almost $14 billion in 2032, SentinelOne is sitting on a potentially lucrative opportunity in this space that could drive its growth in the long run.
Solid earnings growth is in the cards
Though SentinelOne's sales growth is expected to slow down on account of macroeconomic factors in the near term, the good part is the company's focus on margin expansion is set to drive solid growth in its earnings. In fiscal 2024, for instance, SentinelOne's adjusted loss shrunk to $0.28 per share from $0.70 per share the previous year.
The company finished the year with a negative, non-GAAP (generally accepted accounting principles) operating margin of 19%, a big improvement from the negative 49% margin of fiscal 2023. This year, SentinelOne expects further improvements with its margin landing between negative 6% and negative 2%.
This explains why analysts are expecting the company to become profitable on a non-GAAP basis this fiscal year, followed by robust growth over the next couple of years.
Data by YCharts.
However, SentinelOne may be able to deliver stronger earnings growth thanks to catalysts such as generative AI, which could encourage customers to spend more on its offerings. A stronger-than-expected earnings performance in the coming quarters could help SentinelOne regain investor confidence and send this cybersecurity stock higher in the long run, which is why savvy investors can consider using its dip to buy more shares.
