Buy? Despite 106% Growth SentinelOne Stock Trades 80% Below Peak


Running a business is full of twists and turns. Sometimes, a leader’s bad luck can create an opportunity for investors.

This comes to mind in considering Mountain View, Calif.-based cybsersecurity provider SentinelOne and its co-founder and CEO, Tomer Weingarten.

SentinelOne was founded in 2013 and went public in July 2021. Despite growing at triple-digit rates for the last six quarters and boosting its annual recurring revenue (ARR) five-fold since its IPO, the stock has lost 80% of its value since peaking in November 2021.

Is SentinelOne stock a buy? Here are four reasons it might be:

  • Expectations beating growth and prospects
  • Strong demand for two key products
  • Cost controls and improving margins
  • Vision for future growth

In my view, the thing that should give investors pause is macroeconomic uncertainty. I think SentinelOne stock would rise if the Fed stopped raising interest rates and corporations were bullish about economic growth.

Expectations-beating growth and prospects

SentinelOne’s results for the October-ending quarter included expectations-beating growth and profits and a solid revenue forecast for its fourth quarter. According to SiliconAngle, the highlights included:

  • Expectations-beating Q3 revenue. SentinelOne’s revenues jumped 106% to $115.3 million — more than $5 million above the consensus
  • Lower than forecast loss. Its loss before costs such as stock compensation of 16 cents per share — seven cents a share better than analysts expected
  • Disappointing Q3 ARR. Its ARR rose 106% to $487.4 million — which was nearly $90 million below analysts’ estimate
  • Better than expected Q4 revenue forecast. Its Q4 revenue forecast of $125 million was $400,000 more than analysts expected.
  • Full-year revenue FY 2023 revenue up 105%. SentinelOne forecasts its full year revenue in a range — the midpoint of which is $420.5 million — 105% higher than the year before.

SentinelOne was proud of the result while warning that softening macroeconomic conditions could limit its growth. As Weingarten said in a statement, strong “adoption of our Singularity extended detection and response (XDR) platform across endpoint, cloud and identity [enables us] to deliver superior platform value. [However, due to macroeconomic headwinds,] we’re seeing higher cost consciousness and prudence around IT budgets.”

Strong demand for two key products

SentinelOne stands apart from rivals due to its AI-based threat detection and its hybrid hardware approach. Unlike other cybersecurity services that still rely on human analysts, SentinelOne’s Singularity (XDR) platform is based on AI — making it more efficient.

Moreover, unlike cloud-native rivals like CrowdStrike
, SentinelOne operates both cloud services and on-site appliances, which enables it to continue operating normally even if an organization loses its internet access.

This strategy has boosted its customer base and how much customers buy over time. As SilconAngle reported, “SentinelOne’s customer count rose 55%, to more than 9,250 customers, and customers with ARR over $100,000 doubled to 827. The dollar-based net retention rate [— a measure of recurring revenue from existing customers —] was 134% [over 120% is considered excellent].”

SentinelOne is investing in the products that customers are demanding now and reducing investment in those that customers are less eager to purchase now.

As Weingarten told me in a December 9 interview, “We are spending on products that give us a high return on investment such as cloud security and data analytics which are both in high demand. With the macroeconomic uncertainty, customers are putting other products such as endpoint security on hold so we are not budgeting as much for these lower return investments.”

Strong cost controls and improving margins

SentinelOne prides itself on having a solid cash position — with $1.2 billion on its balance sheet — and working to improve its margins. As Weingarten told investors on December 6 in its Q3 2023 Earnings Call, SentinelOne “delivered significant margin upside for two consecutive quarters with over 25 percentage points of improvement in Q3.”

SentinelOne holds its people accountable for boosting the company’s efficiency. As he told me, “Working with [CFO Dave Bernhardt], we measure our progress and set internal goals for each capability — such as sales and marketing efficiency. We have a magic number of 1.2 — [a measure of the growth resulting from marketing spend which implies that were SentinelOne to boost its marketing spend, higher growth would result]. We are agile. If we are not meeting our goals we react — we have nimble workforce.”

All SentinelOne employees “have a metric and we keep our fingers on the pulse. For example, to assess our customer success, we track the net promoter score — [how eager existing customers are to recommend the company to others —] and the amount of service call escalation. For marketing, we analyze the quality of the pipeline and the rate of deal conversion [into signed contracts]. It is the chief marketing officer’s job to hold people accountable,” Weingarten told me.

SentinelOne is on a glide path to becoming profitable by fiscal year 2025. “In the third quarter we improved our operating margin 14% above what people expected of us. We are not making cost cuts, we are moderating spending. We have a multi-year operating plan which will generate 25 to 30 percentage point improvements — from -100% to -60% to -30%,” he said.

Vision for future growth

SentinelOne depends on a combination of mature and rapidly growing lines of business. As Weingarten said, “We have a mixture of steady growth in maintenance and ultra growth with massive total addressable markets. Cloud security is small — $5 billion but expected to growth to $20 billion. Security analytics is a $20 billion market.”

SentinelOne seeks to create its future by adapting effectively to new technologies, upstart competitors, and evolving customer needs. To guide the company’s investments in innovation, Weingarten spends time listening.

Specifically, he explained, “[We drive innovation by] being in the field, integrating intelligence from sales and marketing, customers and Fortune 500 chief information officers. The biggest challenge I see is that enterprise infrastructure needs an overhaul. The current network infrastructure is archaic. It is not a good fit with how people are working.”

SentinelOne aims to deploy AI so that its customers can make decisions that boost efficiency. “The cloud and new ways to collect and process data are not generating business insight. AI needs to be operationalized so companies make better decisions that boost efficiency. How are operations doing? What is working and what is not? Why? What are the causes and effects?”

Coping with forces outside the CEO’s control

In the last few years, CEOs have struggled to cope with forces outside of their control. For example, it became clear in November 2021 that Jerome Powell would be re-nominated as Fed chair to fight inflation — indicating that yet another abrupt macroeconomic change was afoot.

SentinelOne saw many of the same headwinds that other CEOs have mentioned and one they have not — a mental health crisis. As Weingarten said, “There are many factors — inflation, the bursting of the crypto bubble, Russia’s invasion of Ukraine, the European energy crisis.”

There is also a mental health crisis. As he said, “People feel great uncertainty about things like whether they can work from home, the money-losing stock market, widespread disinformation, and mass shootings.”

Fortunately, other industries have been hurt more than cybersecurity. As he said, “We do not do layoffs but we pause hiring for a few months to see if we can achieve our goals with the headcount we have. Maybe it will get worse in the next 12 months. If not, we can resume hiring.”

I am guessing it is not satisfying to be CEO of a company that has seen its stock lose 80% of its value. Weingarten explains it as a sectoral rotation. As he explained, “It is about the rotation between past growth and the uncertainty baked into future growth. Investors are looking for a safe harbor — which is the opposite of high growth.”

He makes the case that SentinelOne is growing rapidly, has little debt and lots of cash, and is on a path to profitability. In addition to its fast growth, Weingarten highlighted the company’s strengthening financial position. As he told me, “Other high growth companies have lots of debt and not enough cash. We have $1.2 billion in cash [and very little debt.] Before the stock fell, our intent was to become profitable by fiscal year 2025. We will get there.”

For what it’s worth, according to CNNBusiness. 18 analysts have a median target of $20 for SentinelOne stock — representing 30% upside.

If it sustains triple-digit growth, becomes profitable, and the Fed stops raising rates, SentinelOne’s stock will climb past that target quickly.

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