1 AI Stock with Soaring Revenues

Cybersecurity firm SentinelOne (NYSE:S) has had something of a lackluster year in 2023. While other technology companies have seen their share prices skyrocket amid investor enthusiasm for AI technology, SentinelOne has gone up by a more modest 16.06 percent year-to-date.

Over a slightly longer time horizon, however, of a full year, Sentinel One is down 29.8%. With such poor performance relative to the broader market, is SentinelOne stock undervalued now? 

SentinelOne Is an AI Play

SentinelOne is a cybersecurity company that specializes in endpoint protection. The company’s key product is a platform called Singularity that integrates security and data across an entire organization, allowing it to be monitored and accessed via a single software platform.

In order to bolster its capabilities, SentinelOne has invested heavily in AI cybersecurity technology. Using neural network architecture and large language models, SentinelOne’s AI tools can identify risks in real time and provide recommended solutions to help human users address security issues rapidly.

This technology may also help organizations reduce their labor costs over time, as SentinelOne aims to create AI tools so powerful that they can be used by human operators without programming knowledge.

One of the best case studies to illustrate the success of SentinelOne’s protection is that of restaurant chain TGI Fridays. Its lightweight, easy-to-deploy endpoint protection allowed TGI Fridays to reduce its monitoring needs while protecting its millions of annual guests from the threat of information theft.

The versatility of its solutions has also made it the go-to cybersecurity solution for everything from point-of-sale systems to protecting data at the corporate level.

Revenue Growth Continues To Soar

In Q2, SentinelOne reported revenue growth of 46 percent year-over-year with total revenue reaching $149.4 million. Annualized recurring revenue, a key area of focus for software brands, rose 47 percent.

The company also increased its customer count by 30 percent to over 11,000, including a 37 percent increase in customers generating $100,000 or more in recurring revenue for SentinelOne.

While SentinelOne is obviously increasing its revenues at an impressive pace, the company is still quite a way from achieving profitability. Its Q2 operating margin was -67 percent, even though gross margin was 70 percent. Net margin in the most recent fiscal year has totaled -74.2 percent, with the company losing a total of $378.7 million.

For the full current fiscal year, SentinelOne expects to generate total revenues of $605 million. Steady growth of subscriptions should help management to achieve this goal, as annualized recurring revenue currently stands at $612.2 million.

The company is also expected to trim its losses from an expected $1.15 per share this fiscal year to $0.77 in the next.

Analysts Are Bullish On the Top Line

Over the coming 12 months, analysts project a 57.4 percent increase in SentinelOne’s revenue. This strong trend of continuing revenue growth may put the company on firmer footing to finally achieve profitability.

It’s also worth noting that SentinelOne will likely see expanded use by government agencies in the near future. Earlier this month, the company announced that its platform had been cleared for use by federal agencies under the FedRAMP compliance standards.

With government bodies investing more heavily in cybersecurity solutions, SentinelOne is in a good position to gain new recurring revenue streams from agencies that choose to use its platform.

A final point to note about SentinelOne is the fact that its revenue growth has slowed sharply in recent quarters. While year-over-year increases of nearly 50 percent are clearly exceptional, this rate has fallen from well over 100 percent just one year ago.

This sharp slowdown in revenue growth has likely played a major role in the comparative lack of investor enthusiasm for SentinelOne this year.

How High Will SentinelOne Go?

Over the coming year, analysts expect SentinelOne to reach a target price of $19 per share. This would represent a gain of 12.4 percent from the most recent price of $16.91.

SentinelOne maintains a consensus hold rating, though it should be noted that no analysts currently rate it as a Sell.

Because SentinelOne has not achieved profitability, the stock can’t be valued using traditional earnings-based valuation metrics. Even allowing for this, however, SentinelOne appears to trade at a significant premium.

Shares are priced at 9.5 times sales and 3.2 times book value, both of which are quite high for a stock that is not on the cusp of turning a profit.

Although SentinelOne’s value argument is somewhat improved by its lack of long-term debt and $1.1 billion worth of liquidity, it’s clear that investors are paying a fairly steep price for the company based on its current performance.

SentinelOne Rivals Make For Stiff Competition

Two of SentinelOne’s key competitors are CrowdStrike and Palo Alto Networks. Examining the pricing of these two companies sheds further light on how SentinelOne is valued relative to other major public companies within its industry.

CrowdStrike, which is expected to be profitable for the coming year, trades at a forward P/E of 62.6. The stock is priced at 391 times cash flow and about 16 times sales. This price, however, is somewhat justified by the fact that it is expected to increase its earnings at a compounded annual rate of over 45 percent over the next five years.

Palo Alto Networks trades at less of a premium, priced at 46.2 times forward earnings and 11 times sales. The company’s price-to-book, however, is extremely high at 43.5.

Like CrowdStrike, Palo Alto Networks has only recently turned a profit. Investors are optimistic that improving margins and increasing growth will propel the stock higher over the next several years.

While all three of these companies clearly trade at very high multiples to their sales, Palo Alto and CrowdStrike have the advantage of already being in the black. SentinelOne, by contrast, has been bid up to high prices on the expectation of future profitability. As such, these two competitors have a distinct advantage over SentinelOne with regard to their valuations.

Is SentinelOne Undervalued?

SentinelOne’s offers investors a mix of positives and negatives. While the company’s pricing may be justified by the high rate of revenue growth analysts project for it going forward, its lack of current profits puts it behind competitors like CrowdStrike and Palo Alto networks.

Given that SentinelOne does not trade at an appreciable discount to these competitors, the stock’s valuation seems to be roughly in line with or slightly higher than its peers.

Ultimately, SentinelOne is a promising company whose technology has at least the potential to make it very profitable in the future. The problem, however, is that it’s very unclear when SentinelOne will achieve profitability.

Earnings estimates suggest that the company will remain unprofitable into at least 2025. In the meantime, the company’s competitors will have time to consolidate their earnings.

Even taking into account the fact that SentinelOne has outperformed analysts’ estimates recently, profitability does not seem to be on the immediate horizon for the young company.

Overall, SentinelOne does not appear to be undervalued at this time. If future growth driven by AI, government contracts and continued customer base expansion improves its earnings, however, it could deliver decent returns. For the moment, the company appears to be worth watching for clearer signs of sustained growth and eventual profits.

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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.