Is SentinelOne Stock a buy it now?

SentinelOne (NYSE: S) released its earnings report for the first quarter of fiscal 2023 (ended April 30) on June 1.

Its adjusted net loss fell from $48.5 million to $57.0 million, or $0.21 per share, but still topped the consensus forecast of $0.03. Under generally accepted accounting principles (GAAP), its net loss went from $62.6 million to $89.8 million.

SentinelOne stock initially rallied after that earnings beat, but it remains nearly 30% below its $35 IPO price. Should investors take a chance on this growing, but deeply unprofitable, cybersecurity company right now?

Image source: Getty Images.

It always grows like a weed

SentinelOne’s Expanded Detection and Response (XDR) platform operates on a hybrid combination of on-premises virtual appliances and cloud-based services. Instead of relying on teams of human analysts, SentinelOne automates the entire threat detection process with artificial intelligence (AI) algorithms.

During the first quarter, SentinelOne’s customer count grew 55% year-over-year to 7,450. (ARR) rose 113% to 591. It also maintained a net dollar revenue retention rate of 131%.

Its revenue and customer growth has slowed slightly over the past year, but it continues to grow much faster than many other cybersecurity companies:

Metric

Q1 2022

Q2 2022

Q3 2022

Q4 2022

Q1 2023

Revenue growth (YOY)

108%

121%

128%

120%

109%

Customer growth (YOY)

74%

75%

75%

70%

55%

Growth in the number of customers with more than USD 100,000 in ARR (YOY)

127%

140%

140%

137%

113%

Net dollar revenue retention rate

124%

125%

130%

129%

131%

Data source: SentinelOne. YOY = year after year.

SentinelOne expects revenue to grow 107% to 110% year over year in the second quarter and 97% to 99% for fiscal 2023, which ends next January. By comparing, CrowdStrike (NASDAQ:CRWD) expects its revenue to grow 51% to 52% in fiscal 2023, which also ends next January. Z-scale (NASDAQ: ZS) forecasts 60% revenue growth in fiscal 2022, which ends in July.

During the conference call, CEO Tomer Weingarten said SentinelOne’s growth reflected its “general strength” across all “geographies, products and customers”, and market demand for its services was unaffected. by macroeconomic headwinds.

But will SentinelOne ever cut its losses?

SentinelOne’s growth rates are staggering, but its losses are staggering. On a GAAP basis, its net loss fell from $117.6 million in fiscal 2021 to $271.1 million in fiscal 2022, and analysts expect it to posted an even bigger net loss of $370 million this year from just $404 million in revenue.

Much of SentinelOne’s losses can be attributed to its exorbitant stock-based compensation (SBC) spending, which consumed 43% of its revenue in fiscal 2022 and 40% in the first quarter of the fiscal year. 2023. These huge stock bonuses also caused SentinelOne’s total weighted average stock count to increase 55% sequentially in the first quarter.

Even after excluding these SBC expenses, SentinelOne still cannot make a profit on a non-GAAP basis. Its non-GAAP operating margin was minus 73% in the first quarter – and it expects that figure to be negative 73% to 75% in the second quarter and negative 60% in the second quarter. 65% for the whole year. Simply put, SentinelOne still hasn’t proven that its business model is sustainable.

On the bright side, its gross margin continues to grow on both GAAP and non-GAAP measures. Its GAAP gross margin increased year-over-year from 51% to 65% in the first quarter, while its non-GAAP gross margin increased from 53% to 68%.

During the call, CFO David Bernhardt attributed the expansion to improving its “economies of scale, data processing efficiency and module cross-selling capabilities.” He also predicted that these tailwinds would eventually propel his gross margins to 75%-80% over the long term.

SentinelOne was also still sitting on $1.6 billion in cash, cash equivalents and short-term investments at the end of the quarter, and its low leverage ratio of 0.2 still gives it room to raise new capital.

The evaluations and the verdict

SentinelOne is trading at a steep discount from its IPO price, but it’s still not a screaming bargain at 17x this year’s sales. CrowdStrike and Zscaler are trading at 18 and 21 times this year’s sales, respectively.

CrowdStrike and Zscaler are growing slower than SentinelOne, but they are both profitable by non-GAAP measures. This key difference arguably makes them safer cybersecurity games than SentinelOne in this volatile market that values ​​financial stability over sky-high growth rates.

SentinelOne is worth chipping away at at these levels, but I think investors should wait for it to get its SBC expenses under control and reduce its non-GAAP losses before accumulating a larger position. For now, CrowdStrike, Zscaler, and other slower-growing cybersecurity companies might be more compelling buys.

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Leo Sun holds positions in CrowdStrike Holdings. The Motley Fool fills positions and recommends CrowdStrike Holdings and Zscaler. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

About Aldrich Stanley

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