1 Under-the-Radar Cybersecurity Stock

Shares of emerging endpoint security provider SentinelOne have been losing lately following a skyrocketing rally from late 2023 to mid-February on optimism surrounding the company’s prospects. With its bottom line still in the red, can the stock regain its momentum anytime soon? 

The cybersecurity industry is expanding rapidly amid growing cyberattacks and increasing sophistication of cybercrimes. This has prompted organizations to adopt and upgrade their cybersecurity programs in this era of cloud computing, artificial intelligence and digitization.

According to Gartner, worldwide end-user spending on security and risk management will grow by 14.3% from 2023 to $215 billion this year.

Emerging as a strong contender in the endpoint security space with its comprehensive cybersecurity solution offerings for enterprises, SentinelOne, Inc. (NYSE:S) attracted a lot of investor attention. The stock rallied more than 90% since November 2023 to hit its 52-week high of $30.76 on February 14, 2024. But its experienced a sharp pullback since then, so what does the future hold?

What Does SentinelOne Actually Do?

SentinelOne provides AI-powered cybersecurity with its Singularity Platform, which offers enterprises complete security across endpoints and automated protection.

Moreover, it launched a generative AI-powered cybersecurity assistant called Purple AI, which is dedicated to threat-hunting, analysis, and response.

The company’s consumer-friendly approach to enterprise cybersecurity, the segment dominated by giants like Microsoft Corporation (NASDAQ:MSFT) and CrowdStrike Holdings, Inc. (NASDAQ:CRWD), convinced analysts and investors to jump on board.

However, the stock fell by more than 20% over the past month because investors were disappointed that management guided a slowdown in demand in fiscal 2025 due to intense competition.    

With the rising demand for endpoint security expected to keep driving SentinelOne’s growth, the stock’s recent downtrend on guidance disappointment may not continue for long. Despite the industry being crowded, there are plenty of opportunities for the company to grab market share. 

Margins Are Improving

SentinelOne surpassed Wall Street’s top and bottom-line expectations in its most recent quarter.

The company’s total revenue increased by 38% year-over-year to $174.18 million in the fiscal fourth quarter ended January 31, 2024, while its annualized recurring revenue (ARR) was up 39% to $724.40 million. Moreover, its non-GAAP net loss per share declined to just $0.02 from $0.13 in the year-ago quarter.

Its path toward profitability has been improving as evidenced by its margin growth. Its non-GAAP gross margin came in at 78%, up from 75% in the year-ago quarter.

Also, its non-GAAP operating margin came in at negative 9%, improving significantly from the year-ago quarter’s negative 35%.

This marked the tenth consecutive quarter of the company, delivering operating margin improvement of over 25 percentage points.

Revenues Up Massively

For the full year, SentinelOne’s revenues grew 47% year over year, while the operating margin improved by more than 30 percentage points.

SentinelOne’s recent financial improvement should help it to achieve positive free cash flow. The company expects to generate positive FCF and operating income by the end of its current fiscal year.

In addition, the company is making significant progress toward customer acquisition despite the competitive landscape. SentinelOne saw a 30% year-over-year growth in customers with an ARR of $100,000 or more, and the ARR per customer registered a double-digit increase year-over-year.

However, its financial outlook led to investors’ disappointment. For the fiscal year 2025, the company expects revenues to come in between $812-818 million.

Investors were disappointed about the revenue outlook because it indicates an annual 31% increase at the midpoint, significantly lower than the growth delivered in fiscal 2024.

SentinelOne expects a non-GAAP gross margin between 77.5% to 78.5% for the year, while non-GAAP operating margin is expected to come in the range of negative 6% to 2%.

Although the recent outlook might have hurt investors’ sentiments, SentinelOne looks poised to turn profitable soon.

Where Will SentinelOne Stock Be 1 Year?

According to analysts, SentinelOne stock can rise to as high as $29.71 per share over the next year, indicating an upside of 28.3% from the current price level.

Of the 28 analysts covering the stock, 15 recommend buying it and 13 rate it as a Hold. The favorable analyst sentiment indicates the stock’s turnaround potential. 

Moreover, the stock was upgraded by Bank of America Securities last month when they switched to a buy from neutral. Also, the analysts raised the price target to $35 from the previous $26.50, citing positive trends in the cybersecurity industry.

BofA analysts regarded SentinelOne as one of their favorites in endpoint security and believe the raised valuation is justified.

Improving macroeconomic conditions and favorable industry trends should help the company generate stable sales and free cash flows. Moreover, strong demand for AI-powered security solutions should provide a buoyant tailwind.

Should You Buy the Stock Now?

SentinelOne’s financials have significantly improved thanks to its expanding customer base, strategic partnerships, and constant innovation. Despite intense competition, it is gradually expanding its market share.

While 18 analysts have revised their guidance downward recently on the back of poorer than expected guidance, and the company still is struggling to reach profitability, that is likely to change over the coming year.

Certainly, the stock still trades at a high revenue multiple but it’s come down in recent weeks and has a lot of potential to regain its momentum, and offers the potential to be a solid portfolio addition.

For technical analysts, a turnaround is still needed before a clear Buy signal takes place. The short-term momentum is lower but that may very well subside sooner than later.

Lastly, it should be noted that a discounted cash flow forecast analysis paints a slightly more pessimistic view of SentinelOne’s prospects with fair value coming in at $24.16 per share, a good bit lower than analysts’ consensus, even after the downgrades.

---

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.