SentinelOne (NYSE:S) is a very interesting cybersecurity play, one which is doubling its operations at this point in time, driven by a strong product and service line-up in a growing cybersecurity market. After a strong pricing and first day trading action, valuation expectations have risen a lot, too much for me to see real appeal here, although SentinelOne is an interesting name to keep an eye on in the coming quarters.
Cyberattacks - All About Data
SentinelOne understands that a cyberattack is an attempt to expose, steal, disable, alter or gain data. The nature of cyberattacks is that it is military grade, high resourced, and often executed by nation-state operators, making it time to create a formidable defense against such attacks.
The company has developed a purpose-built AI powered detection and response platform, called XDR, to make cybersecurity truly autonomous. Cybersecurity remains an underrated issue, even as awareness is up. While the society has gone digital, certainly after Covid-19, most of the cybersecurity solutions continue to be dominated by legacy antivirus solutions.
The basic premise of the solution is that the AI solutions detect anomalies when multiple data feeds are correlated. This is turned into a storyline, organized through the console platform where it can easily be analyzed by analysts and algorithms, after huge amounts of data have been gathered already.
The company has nearly 5,000 customers at this point in time, a great achievement after the company was only founded in 2013. There is still great potential with the addressable market for the company seen at $40 billion by 2024, expected to grow at a compounded annual growth rate at around 12% from here.
Valuation Considerations
Management and underwriters aimed to sell 35 million shares in the company in a price range between $31 and $32 per share. Strong demand made that the final price has been hiked to $35 per share, making that SentinelOne generated $1.22 billion in gross proceeds from the offering. Investors related to Tiger Management have committed to buy $50 million in shares at the offer price here.
With 253.5 million shares outstanding, the company is awarded an $8.87 billion equity valuation. The company operated with $343 million in net cash ahead of the offering. Including the gross proceeds from the offering, I peg net cash at $1.44 billion on a pro forma basis, for an operating asset valuation of $7.33 billion.
The company has seen strong growth, but it is still relatively small. For the year 2019 (ending in January 2020), the company generated $46.5 million in sales on which a huge $75 million operating loss was reported. Revenues exactly doubled to $93 million in 2020 (ending in January 2021) as operating losses rose to $115 million. While losses increased on an absolute basis, the relative losses came down a bit, but of course, still exceed reported revenues.
Fourth quarter sales of $29.9 million came in at an annualised rate of $120 million by the end of 2020, yet momentum remains very strong with fourth quarter sales up 96% on an annual basis.
First quarter sales for 2021 even accelerated, with sales up 108% to $37.4 million, for a run rate of $150 million. At this rate, the $7.33 billion operating asset valuation comes down to a 49 times annualised sales multiple, albeit that it is still accompanied by huge operating losses.
Shares have risen to $44 on the first days of trading. The $9 move higher added nearly $2.3 billion to the valuation, for a $9.6 billion operating asset valuation, pushing up the operating asset valuation to 64 times sales. These are astonishing valuations, as undoubtedly investors were inspired by the huge growth rate and multiples attached to businesses which are able to grow sales at a triple-digit growth rate in this market, including Snowflake, among others.
Concluding Remarks
It is very obvious that the primary risk in this offering is the valuation at 64 times annualized sales, and closely related to this is the quality and effectiveness of the operations. The company operates in a competitive field as it is hard to judge for an outsider to see how effective solutions are, as the easiest way to judge this is to simply look at the commercial traction of its peers.
The company counts legacy providers like McAfee (MCFE) and Symantec as competitors, but I do not think that these are really good comparisons. Better competitors might be broad-based peers like Palo Alto Networks (PANW), but the best peers might be names like CrowdStrike (CRWD), among others.
CrowdStrike reported a 70% increase in quarterly sales in its most recent reporting period, with sales running at a rate of $1.2 billion, making that it is valued at around 45 times sales here, although the annualized loss rate of $120 million is far lower than SentinelOne.
With SentinelOne trading at effectively a 1.5 times sales multiple factor higher than CrowdStrike, it is noteworthy that the company is growing at a much more rapid pace (although it is much smaller as well), but on the other hand, there are larger losses reported as well.
All of this, and a very high valuation for CrowdStrike itself, makes me cautious here, although it certainly is an interesting name to keep an eye on going forward.
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