Is SentinelOne Stock a Buy? Cybersecurity startup SentinelOne (NYSE:S) is one of many tech stocks that has seen punishing losses in 2022. As investors scramble to find opportunities in this volatile market, stocks like SentinelOne are coming under increasing scrutiny.
The company provides AI-powered cybersecurity solutions. Its platform gives businesses an end-to-end set of tools for detecting and addressing cybersecurity threats across their networks.
With AI enhancement, SentinelOne’s software boasts a high degree of autonomy, reducing the day-to-day demands on human cybersecurity professionals.
120% Increase In Top Line Sales
In the company’s most recent quarterly report, SentinelOne detailed quarterly revenues of $65.6 million. This represented an increase of 120 percent from the $29.9 million reported in the same quarter in 2021.
Revenue for the full fiscal year totaled $204.8 million, also up 120 percent compared with full-year revenues in 2021.
SentinelOne’s forward guidance suggests that the company can maintain high levels of growth into the coming year. Full-year revenue for FY2023 is projected at $366 to 370 million, inferring growth of about 79 percent year-over-year.
Another attractive item from the company’s earnings report is its annualized recurring revenue, which increased by 123 percent YoY. For the most recent year, ARR was $292.3 million. This coincided with a 137 percent increase in customers generating ARR of over $100,000.
At the end of the last quarter, SentinelOne had 520 such customers. The company also saw a large expansion in its customer base overall, with the number of customers rising 70 percent YoY.
Sales Are Up But What About Profits?
SentinelOne’s margins also grew in FY2022, with non-GAAP gross margin advancing to 63 percent from 58 percent in 2021.
Management expects margins to remain at this level going into 2023, with forward guidance suggesting non-GAAP gross margin of 63-64 percent.
Despite its obviously high margins and robust revenue growth, SentinelOne has not yet reached profitability.
In the last quarter, net losses totaled $71.7 million, with a full-year loss of $271.1 million for FY 2022 overall. In 2021, these losses were $37.8 million and $117.6 million, respectively.
Who Competes with SentinelOne?
Competition is a serious problem for SentinelOne.
Although the company’s automated approach allows companies to spend less time responding to threats, it’s still difficult for a relatively young startup to compete with much more established businesses.
SentinelOne has a good value proposition, but it could take time for it to begin eating away at Crowdstrike and other competitors.
SentinelOne’s competitors include several large, well-known cybersecurity software companies. Among these are CrowdStrike, Sophos, Microsoft and Cisco.
This makes it somewhat difficult for SentinelOne to continue its expansion, as many of its closest competitors have moats around their existing customer bases.
SentinelOne has done quite well in attracting users, but the broader cybersecurity market is still dominated by much larger names.
SentinelOne Has Lots of Cash, But Burning Fast
SentinelOne’s large and accelerating net losses are the most obvious problem for the cybersecurity startup. Although it is sitting on a cash stockpile of $1.7 billion, the company is clearly losing money at a rate that investors are right to be concerned about.
SentinelOne has a low debt-to-equity ratio, leaving the probability of bankruptcy quite low. However, the stock price is unlikely to rise much while the company is burning through cash at its current rate.
SentinelOne is also likely overvalued on the basis of its current financial results. The best metric for illustrating this fact is the company’s price-to-sales ratio, which is running at an astonishingly high 31.91.
A final risk factor for investors is the market’s generally skeptical view of high-growth, unprofitable tech companies at the moment. Rising interest rates may not affect SentinelOne directly due to its relatively low debt load, but a general slowing of the economy could still dampen its extremely high growth forecasts.
Is SentinelOne a Buy?
There’s no question that SentinelOne is performing extremely well when it comes to growth and margins. The company has also developed an extremely useful forward defensive software product that addresses a major need of modern businesses. Through its creative use of AI, SentinelOne provides a solution that allows cybersecurity teams to be leaner and more productive.
SentinelOne also has decent support based on analyst ratings. The median 12-month target price for the stock is $46.50. If the stock manages to achieve this price, it would have an upside of 107.4 percent, based on its current price of $23.65. These numbers are likely too optimistic, but there’s at least a chance the stock could produce decent returns this year.
With all of this said in support of the company itself, the stock still doesn’t look like a buy just now. Until SentinelOne begins to pare back its losses and move closer to profitability, it’s unlikely to attract enough buying activity to raise the share price toward the consensus target. The stock market is currently punishing high-growth tech stocks, and SentinelOne doesn’t seem likely to break out of that trend.
If the stock was a better value, it might be a sensible proposition for highly risk-tolerant investors seeking out bargains in a down market. Even after losing over 50 percent of its value YTD, however, the stock still looks quite expensive. Without a value argument to support it, SentinelOne is simply too speculative. This is especially true for a company that has not yet achieved profitability.
SentinelOne is a tough company to pass on because of its obviously appealing software product, but the current metrics and performance don’t seem to support it as a good buy.
While the company may very well turn around, it’s too speculative to recommend as an investment right now. Investors who already own the stock, however, would likely do well to hold their existing shares.
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