To The Moon

$SentinelOne, Inc(S)$

Since July 18, SentinelOne's stock has risen approximately 40%, but this surge is more linked to an external factor—a major outage caused by its competitor CrowdStrike—than its own operational achievements. The outage disrupted millions globally, raising questions about whether SentinelOne can maintain its stock gains.

fell short of Wall Street’s expectations for third-quarter earnings, reporting breakeven results on an adjusted basis compared to the anticipated 1 cent profit per share, according to LSEG data. The disappointing performance caused the company's shares to drop over 12% in after-hours trading.

Earning Overview

SentinelOne's Q3 FY2024 earnings report revealed some mixed results. The company posted breakeven adjusted earnings for the quarter, falling short of Wall Street’s expectations, which had forecasted a 1-cent profit per share. This under performance led to a 12% drop in its stock during after-hours trading. The earnings miss comes as the company faces fierce competition from larger cybersecurity players like Palo Alto Networks and CrowdStrike, who have been ramping up investments in infrastructure to attract more clients​.

However, the company showed strong revenue growth, with Q3 revenue rising by 42% YoY to $164.2 million, driven by an increase in Annual Recurring Revenue (ARR), which grew 43% year-over-year. Despite this, SentinelOne remains unprofitable, posting a net loss of $18.2 million for the quarter. It is also working toward improving its gross margins, which increased to 79%, a significant improvement from the previous year.

The report underscores the growing demand for cybersecurity services amid rising cyber threats, but also highlights the challenges of capturing market share in a competitive industry. For further information, you can refer to their official earnings release.

Fundamental Analysis

Strong Growth: SentinelOne reported Q3 FY2024 revenue of $164.2 million, a year-over-year increase of 42%. Its Annual Recurring Revenue (ARR) grew to $663.9 million, up 43% YoY, signaling solid demand for its solutions​.

Unprofitable but Improving: SentinelOne narrowed its operating loss to $18.2 million from $132 million in Q3 FY2023, supported by reduced operating expenses as a percentage of revenue. R&D expenses fell to 22.1% of revenue (down from 32.8%), while sales and marketing expenses also decreased as a percentage of revenue.

Free Cash Flow

Free Cash Flow Concerns: SentinelOne has not yet achieved positive free cash flow, although its free cash flow margin has shown improvement to around 18%.

Investment Highlights

The company continues to benefit from growing demand for its cybersecurity solutions, especially its Singularity Cloud platform, which remains its fastest-growing offering.

In the endpoint security market, SentinelOne and CrowdStrike are considered the leading players. CrowdStrike is significantly larger, with five times the recurring revenue of SentinelOne, but the latter has been growing at a faster pace and trades at a lower revenue multiple (10x compared to CrowdStrike's 18x). Furthermore, SentinelOne is making progress toward profitability, with a free cash flow margin of 18% in the latest quarter, compared to CrowdStrike's 35%.

The fallout from CrowdStrike's outage presents an opportunity for SentinelOne to capture market share, unfortunately SentinelOne had not capture some large enterprises. SentinelOne’s management has capitalized on this, emphasizing their platform's reliability. Additionally, Alphabet's recent valuation of Wiz at 60x revenue has raised interest in SentinelOne as a potential acquisition target.

The customer base exceeds 11,500, with strong growth among large enterprises contributing significantly to recurring revenue.

Technological Leadership: SentinelOne’s Singularity platform, powered by AI, is one of the key drivers of its growth. The AI capabilities help automate the identification and response to cyber threats, providing businesses with proactive protection. This focus on autonomous threat detection and response is seen as a major differentiator in a crowded cybersecurity market, offering a significant edge over traditional, manual solutions​

Growth Prospects

Expansion Opportunities: The competitive landscape remains challenging, with larger players like CrowdStrike and Palo Alto Networks continuing to dominate. However, SentinelOne is showing strong growth, particularly in capturing mid-market customers and expanding internationally, which could fuel further growth

Challenges

Profitability Roadblocks: Despite strong revenue growth, SentinelOne remains unprofitable. This is a key concern for investors, as the company is still investing heavily in growth and infrastructure. The rise in gross margins to 79% and improvements in cash flow are positive signs, but profitability remains a key hurdle.

Intense Competition: The market for cybersecurity is highly competitive, and larger competitors like CrowdStrike have more established brands and larger customer bases. However, SentinelOne's faster growth rate (47% YoY increase in fiscal 2024 revenue vs. CrowdStrike's 36%) suggests it can continue expanding its footprint despite the competition.

Investor Concerns: Despite its growth, investors are cautious about unprofitable tech companies, especially in an environment where profitability and free cash flow are becoming more critical. Stock-based compensation and continuous investment in scaling also raise concerns about long-term financial sustainability.

Guidance

In its Q3 FY2024 earnings report, SentinelOne provided updated guidance for the full fiscal year, adjusting expectations downward. The company now forecasts annual revenue in the range of $605–$610 million, a decrease from the prior guidance of $625–$630 million. This adjustment reflects a more cautious outlook on macroeconomic factors affecting customer spending and deal cycles.

SentinelOne anticipates a non-GAAP operating margin for FY2024 of approximately -26%, reflecting ongoing efforts to improve profitability but acknowledging the challenges of scaling in a competitive cybersecurity market.

The company continues to focus on expanding Annualized Recurring Revenue (ARR), with Q3 ARR reaching $632 million, representing a year-over-year growth rate of 24%, though sequential growth was relatively modest. The shift in guidance highlights both the opportunities and challenges the company faces as it aims to capture market share while balancing growth and profitability.

Valuation

At its current valuation, SentinelOne has a market capitalization of $7.9 billion, including $200 million in cash and $900 million in investments, yielding an enterprise value of $6.8 billion. Despite strong growth, with fiscal 2024 revenue rising 47%, the company remains unprofitable. Over the past 12 months, it generated $674 million in revenue but posted a net loss of $300 million and free cash flow near zero. Stock-based compensation is a notable expense, totaling $220 million.

Market sentiment

The market views SentinelOne as a promising growth story with a pathway to profitability, but risks related to competition and financial performance create a cautious undertone. Analysts are watching its ability to sustain growth and capture market share while improving financial metrics.

Conclusion

SentinelOne's stock has under performed since its IPO, with investors wary of unprofitable growth companies and the impact of high stock-based compensation. If SentinelOne can continue gaining market share and improving free cash flow, investor sentiment could shift more positively.

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