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SentinelOne (NYSE:S) is the latest of the next-gen cybersecurity vendors, with a best-of-breed portfolio and technology, trailing in the footsteps of CrowdStrike (CRWD). While it is smaller, is has a higher growth rate and significantly lower valuation as well.
After the latest sell-off, I am doubling down on my longstanding bullish call. While it seems investors were underwhelmed by the revenue guidance, the company has made it the priority to turn the page on profitability by the end of the year. For the longer term, there still aren’t any signs that SentinelOne couldn’t continue to follow in CrowdStrike’s footsteps, becoming a multibillion-dollar business over time, which compares to a current market cap of $6.6B and enterprise value of $5.5B.
Previous coverage in September already remarked the slowdown in growth (which admittedly has been quite steep, coming down from above and near triple digits in just a few quarters). However the stock reaction seemed too fierce as well as the stock wasn't all that expensive anymore (due to the strong growth as the stock had dropped from its near-IPO levels).
Revenue for the year grew 47% to $621M, of which $174M in Q4, marking 38% growth. ARR (annual recurring revenue) grew 39% to $724M, with $61M of net new ARR in Q4. ARR per customer grew double digits (around 115%), with management indicating it is for now mostly focused on expanding market share (rather than its customers’ wallet share/revenue per customer). RPO was up 47% and 15% QoQ, reflecting larger deal sizes and longer duration.
For 2024, SentinelOne is guiding for 31% revenue growth to $814M, with 36% growth in Q1 to $181M. SentinelOne continues to see a challenging environment with organizations focused on their costs.
Given the market reaction it seems investors were underwhelmed by this guidance. On the earnings call, management said it provided a prudent guidance without necessarily looking for massive beats and raises. Nevertheless, it did call out its focus on achieving profitability this year as one of the bottlenecks in delivering (investing for) higher growth.
Largely things are very elective in how we design the plan. I think we had a commitment and our main focus and anchor for this year is to inflict to free cash flow positive generation and positive operating income by the end of the year. So that to us was really the guiding factor. There is a degree of constraint on our growth that just stems from that. There's no question that we can potentially grow even more, but we are prioritizing profitability.
We are prioritizing proving the sustainability of our model. And that is I think what you're seeing in this guide. We're taking a prudent view to how much we can invest back in the business while staying true to our commitment and we find that to be the balance that you're seeing with the guidance. In any event in this year if we can change that if we can drive more growth we will absolutely do it. And I think that as we look into the out years there's no question that we're looking to sustain high growth rates to the best of our ability.
One of the longstanding criticisms of the company has been its lack of profitability to say the least (with over 100% operating loss margin in 2021). As a small company, however, it was simply investing in growth and scale as well as its technology. For the last 2.5 years, SentinelOne has been heavily improving its profitability, delivering its tenth consecutive quarter of over 25 points of improvement YoY. Gross margin remained stable in the high 70s.
Specifically, operating margin improved by over 30 points for the year, with Q4 marking a 9% loss margin, a 26-point improvement YoY. Operating loss was reduced from $44M to $16M. Similarly, FCF outflow was reduced from $25M to $11M. FCF and net income loss margins reached single digit levels as well at 6% and 4% respectively.
Overall, SentinelOne has been successfully balancing its investments and pace of growth over the last few years (even in the wake of the macro slowdown), as well as going forward. For calendar year 2024, SentinelOne is targeting to deliver FCF and operating income by the end of the year (in line with prior FCF guidance). For the full year, operating margin loss of 4% at the midpoint is expected (and 14% in Q1), marking an improvement of 15 points YoY.
The market cap of $6.6B and enterprise value of $5.5B (given the $1.1B in cash and equivalents and no debt) compares to forward guidance of $814M revenue, and ARR that will start approaching $1B by the end of the year. This makes for a forward P/S of 8x (and EV/ARR below 6x). For a company growing over 30%, this is arguably undervalued.
For a few comparisons, Datadog (DDOG), which has been growing well below 30%, is valued at over 15x P/S. CrowdStrike, which has a similar growth rate outlook as SentinelOne, is even more expensive at nearly 20 forward P/S, on the order of 2.5x more expensive. MongoDB (MDB), which has also dipped well below the 30% growth rate, is valued at 13x forward P/S. GitLab (GTLB), whose guidance is dipping below 30%, is valued at an 11x forward multiple. Four more companies with a double digit forward P/S and/despite lower than 30% growth are HubSpot (HUBS), The Trade Desk (TTD), ServiceNow (NOW) and Atlassian (TEAM). Even Veeva (VEEV), which is growing in the low teens at best, is valued at a 13x multiple.
Perhaps the closest comparison aside from CrowdStrike, Zscaler (ZS), which has been slowing down from a low 60% growth rate in 2022 towards and below 40% in the second half of 2023 and approaching 30% going forward, remains valued at over 13x forward P/S after its recent dip.
Overall and simply put, SentinelOne is growing markedly faster than most stocks with a similar (or in plenty cases higher) valuation, or it is significantly undervalued compared to companies with a similar growth rate. As there is no fundamental reason for this discrepancy, this implies the stock is undervalued.
What this could mean for investor returns is that even if growth were to dip into the 20s like some of the names mentioned, the P/S valuation seems to be derisked, or in other words might represent a floor. So, as SentinelOne should have the possibility to grow at such a clip for many years to come (with as argued the P/S unlikely to dip much further), this means that the stock should be roughly correlated with its growth rate. Hence, the stock might deliver strong double-digit investors returns (on average).
As some initial evidence of double-digit return potential and valuation floor, in previous coverage, the stock was (also) trading at 8x forward (FY2023) revenue. Two earnings reports later, the stock is currently trading at 8x FY2024 revenue, but is nevertheless up 40% since then.
Despite management saying it isn't purposely setting the guidance low in order to beat and raise, one could nevertheless remark that (apparently then due to improved execution) SentinelOne has exceeded expectations in the last few quarters after its Q1 revenue and guidance miss, which caused the shares to crater.
However, due to decent beats since then, the actual FY2024 performance was just $10M below the low-end of the initial range (and $20M above the revised range). For example, already in Q2 of last year the guidance had called for revenue growth to approach the mid-30s, but this is (still) exactly the same guidance as for its Q1 FY2025 growth rate, three quarters later than it originally expected to dip to such a growth rate.
Hence, with management calling this more challenging macro environment the "new normal" (combined with some further prudence given the profitability goal), SentinelOne might have become at least a bit more conservative in its guidance. So, regardless of precise timing and rate, the point stands that SentinelOne remains aptly positioned to follow CrowdStrike in becoming a multibillion-dollar company over time, the kind of trend that should really drive long-term returns (given the <$7B market cap).
SentinelOne has been focusing on both endpoint as well as AI, data, identity, and cloud (its “emerging platform solutions”). Combined, the latter represented over a third of FY2025 bookings.
On the competitive landscape, we continue to win a significant majority of competitive evaluation. Our win rates and differentiation remain incredibly strong. Our AI-powered Singularity platform delivers security and value that resonates with customers of all sizes across all geographies.
One example provided for its data platform, which represented 10% of quarterly bookings, was where a customers replaced the Splunk solution. Others were provided for ransomware, cloud, and Purple AI.
These examples demonstrate our competitive success, as well as our transformation from an autonomous endpoint company, to an enterprise-wide autonomous security platform. (...) Our Singularity platform is data-driven adaptive and delivers AI-based security, all of this through a unified platform and single agent. (...) Our competitive differentiation was born out of AI, long before AI became the buzzword and competitors started bolting on chat bots. (...) Purple AI is the next chapter of this journey. It will become generally available in just a few weeks, laying the foundation for a transformative step forward in enterprise security and efficiency.
The company has made two recent acquisitions, PingSafe (CNAPP: cloud-native application protection platform) and Stride (hyperautomation). Both technology acquisitions, for $115M in cash and stock combined. PingSafe will start getting sold by midyear. Overall, the company expects 2-3 points of impact on FY2025 EBIT margin. Describing these platforms:
On cloud security, we are combining our cutting-edge cloud workload protection with CNAPP from recently acquired PingSafe. The combination of SentinelOne's agent-based and PingSafe's agentless security will create the first-of-its-kind cloud security platform powered by unified AI and security data analytics. (...) During our diligence process and through our own experience using PingSafe, it went toe to toe with every major CSPM and CNAPP vendor on the market. (...) The addition of PingSafe's CNAPP to our unified Singularity platform creates a highly compelling choice for all businesses. Cloud security customers will no longer have to navigate the complexity of disparate point solutions.
STRIDE is a next-generation security orchestration platform designed to circumvent the complexities and cost burden of legacy source solutions with a complete streamlined no-code approach and unlimited flexibility. With the addition of STRIDE to the Singularity platform, we're making the most automated cybersecurity platform in the market hyper-autonomous.
SentinelOne's heavy loss margin has long been a strong point of criticism. SentinelOne has been addressing this point rather convincingly for the last 2.5 years already with 10 consecutive quarters of 25-point YoY improvements. For this year, the company will finally turn the page regarding profitability, and is potentially sacrificing some growth in doing so. So ironically, investors looked at this somewhat lower growth rate as a reason to sell off the stock.
However, with growth for the year still expected at over 30%, as well as a market opportunity that has only become larger over time as the company has diversified away from just endpoint, the company remains focused on sustaining a high growth rate for the years to come. If anything, with reaching profitability in the coming year (and hence the YoY improvement in operating loss margin that will start slowing down), there should be some additional headroom to invest in growth going forward.
With management pretty much admitting the focus on profitability is hindering its ability to invest in higher growth, investors should see the slowdown in growth as more a sign of a balanced approach regarding growth and profitability, rather than a sign of a systematic slowdown. With key competitor CrowdStrike for example setting a target of reaching $10B in ARR over time, given SentinelOne’s best-in-class technology there should be no reason why it should start flatlining in size around the $1B mark, just a tenth of where CrowdStrike has a line of sight towards.
So, given SentinelOne’s valuation that has dipped back into a single digit multiple of its revenue and ARR, which is unambiguously (perhaps quite significantly) undervalued for a company delivering over or near 30% growth on the horizon (as shown by many examples as comparison), the stock remains a great investment.