Cybersecurity major SentinelOne (NYSE:S) has struggled over several years, delivering very large losses to the shareholders who purchased it early on. Peaking at over $75 per share in 2021, S has gradually lost ground and now trades below $15. In the last 12 months, SentinelOne’s struggles have continued, with shares losing a further 33.7 percent. Has this steady selloff left SentinelOne stock undervalued, or do the shares still have room left to fall?
Is SentinelOne Oversold?
A cursory glance at SentinelOne shows that it doesn’t carry the kind of extremely high valuation that many tech firms do in today’s market. At 5.0 times sales and 3.2 times book value, S is far from sky-high. It should be noted, though, that SentinelOne’s modest cash flows give it a price-to-operating-cash-flow ratio of over 100.
Coming off of a difficult year, SentinelOne stock has also slipped well below the range projected for it by analysts. The consensus price target for S is $21.30, giving it a projected upside of more than 45 percent from the most recent price of $14.61. Even more compelling is the fact that the lowest price target of $16 would imply an upside of about 9.5 percent. Of the 33 analysts who have rated S, 21 currently rate it as a buy, while 12 rate it as a hold.
Even so, the low share prices haven’t deterred fairly heavy insider selling over the last six months. During that period, 94 insiders have sold shares, while only 59 have bought. As recently as December 11th, SentinelOne’s CEO sold over 10 percent of his shares in a transaction valued at nearly $2 million. While insider selling doesn’t necessarily imply that a stock is trading above its fair price, it may suggest a lack of confidence in a near-term recovery by management and other insiders.
SentinelOne’s Revenue + Loss Problems
The biggest problem facing SentinelOne at the moment is the fact that its rising revenues haven’t translated into profitability. In Q3, for example, the business reported impressive revenue growth of 23 percent compared to the previous year, with quarterly revenues rising to $258.9 million. ARR, meanwhile, rose to $1.06 billion, also a 23 percent increase from the year-ago period. SentinelOne also grew its base of customers contributing $100,000 or more in ARR by 20 percent.
While this growth is certainly positive, SentinelOne’s net losses remain concerning. Net loss in Q3 totaled $60.3 million, equating to a net loss margin of 23 percent. Though this was an improvement on the year-ago quarter’s loss of $78.4 million, it was still a considerable loss for the business. For the first nine months of the year, SentinelOne lost $340.5 million, a substantial increase on the $217.7 million it lost in the first nine months of last year.
SentinelOne is performing a bit better in terms of cash flows, though its cash flow margins remain in single-digit territory. In Q3, SentinelOne achieved an operating cash flow margin of 8 percent and a free cash flow margin of 6 percent. It’s important to note, however, that these were considerable improvements on both fronts, as cash flow margins a year ago were still negative.
It’s also important to take SentinelOne’s strong balance sheet into consideration. Current assets alone total $956.9 million, more than the total liabilities of $882.0 million. SentinelOne also carries minimal debt, a fact that could insulate it from the negative effects of operating at a loss for quite some time.
SentinelOne has also started using some of its cash to buy back shares, an activity that will likely be welcomed by investors who have held S through the punishing losses of the past few years. Q3 saw over $100 million in repurchases of common stock, part of a $200 million buyback program announced earlier this year. With cash flows now positive and growing, SentinelOne’s management will likely have more room for further buybacks going forward.
Can SentinelOne Keep Growing To Hit Profitability?
Although SentinelOne is still losing money at a concerning rate, its path to profitability appears fairly straightforward. With recurring revenues rising and net loss margins improving significantly compared to a year ago, SentinelOne’s ability to achieve GAAP profitability will almost certainly hinge on its ability to maintain high rates of revenue growth and acquire more high-dollar customers. Q3’s results showed strong execution in both of these categories, suggesting that management is likely on the right track to put the business in the black.
Looking out a few years, projections suggest that SentinelOne could become a strong generator of free cash flow. Current estimates project free cash flow reaching over $200 million by 2028 and potentially exceeding $600 million by 2035. While such long-term projections are prone to error due to the unforeseeable circumstances that can come up over 10 years of more of a business’s lifetime, these figures would suggest that SentinelOne is heavily undervalued on a discounted cash flow basis.
Is S an Undervalued Buy Now?
With the stock trading toward the bottom of its 52-week range and over 80 percent down from its all-time high, there’s a real possibility that SentinelOne could be undervalued. With that said, it’s also important to recognize that S could carry some fairly significant risks if the business can’t make rapid progress toward GAAP profitability or if the rate of free cash flow growth lags analyst projections. Like other cybersecurity stocks, S is also prone to the risks associated with high-profile breaches, an increasingly relevant worry in today’s cybersecurity environment.
This likely places SentinelOne in the category of being a high-risk, high-return stock. If the business can keep growing as expected, investors who buy at today’s prices could see significant upside with the potential to keep compounding over several years. With the stock already out of favor among investors, though, S could also be prone to further selloffs if it underperforms expectations. SentinelOne could also be exposed to the risk of a general tech stock selloff if the market sours on AI stocks, a possibility that is looking increasingly likely.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.