miniseries
Thesis
SentinelOne, Inc. (NYSE:S) has emerged as a top-tier leader in the field of next-generation Endpoint Detection and Response (EDR), leveraging its innovative platform for revenue and ARR growth. The company is strongly positioned to further capture market share in the Endpoint segment, explore expansion into related markets, and sustain impressive growth supported by enhancing fundamental performance. At 6.2x EV/Sales with 24% of market cap in cash on the balance sheet, I think the valuation is compelling at current levels. My end-of-year price target of $20 is derived from a 7x EV/Sales multiple applied to the CY24 revenue estimate.
Company Description
A rapidly growing next-generation endpoint vendor, SentinelOne combines EPP, EDR, and cloud workload protection into a single agent on its Singularity Platform. The company offers cloud-delivered and on-premises formfactors, as well as MDR addon Vigilance and threat intelligence WatchTower. SentinelOne offers three tiers of solutions, the highest being Complete which includes EPP, EDR and cloud workload protection. MDR, threat intelligence and XDR capabilities are available as additional modules.
Q1 Review & Outlook
SentinelOne released Q1 2024 results in June, which were disappointing as the revenue fell short of expectations by 3%. The management attributed this underperformance to various factors, such as smaller deal sizes, longer sales cycles, lower pipeline conversion rates, and decreased product usage. Consequently, the management revised the annual recurring revenue (ARR) outlook from over 50% growth to mid-30s growth. In order to align with the lower revenue expectations and achieve break-even by FY25, the company announced a 5% reduction in headcount.
SentinelOne maintains a disciplined approach to competing against larger peers by leveraging its best-of-breed technology. While larger competitors have the advantage of scale, SentinelOne's competitive position remains strong. The company has consistently achieved win rates of over 70% against CrowdStrike Holdings, Inc. (CRWD) and has seen win rates in the high 70% range against Microsoft Corporation (MSFT), with improvement over time. SentinelOne's peers have engaged in aggressive pricing strategies, but the company has maintained stable gross margins of 75.1% and emphasized price discipline alongside their healthy win rates. Furthermore, the average annual recurring revenue per customer increased by 22% YoY to $52.8k during the last quarter, and average selling prices also saw year-over-year growth.
Despite high optimism leading up to the earnings call, the stock price reacted negatively. Although the results were disappointing, I believe the market has overreacted to the earnings. Considering the CY24 guidance and the fact that 24% of the market capitalization is in cash reserves, I find the current valuation compelling.
Solid Position in the Market with Strong Brand Recognition
The endpoint security market is undergoing a significant transformation as traditional antivirus solutions are being replaced by AI-based EDR systems such as CRWD and SentinelOne. Legacy solutions are no longer effective in detecting malware created by hackers, leading next-generation vendors to focus on developing robust AI and machine learning engines that can identify unusual or suspicious behaviors on endpoints. There is a strong indication that SentinelOne has a promising future and will likely gain a larger market share in the coming years. Reviews of SentinelOne's product capabilities suggest that the company is on par with CRWD, which is known for its exceptional detection technology. SentinelOne's reputation and market recognition have significantly improved in recent years, as evidenced by the company's third-place ranking in the 2022 Gartner Magic Quadrant survey for endpoint platforms.
Gartner
Valuation
SentinelOne stock price has dropped significantly in 2023 amidst a tough macro environment and financial results below expectations. However, at 6.2x EV/Sales with 24% of market cap in cash on the balance sheet, I think the setup is compelling at current levels. My end-of-year price target of $20 is derived from a 7x EV/Sales multiple applied to the CY24 revenue estimate.
Seeking Alpha
Risks
SentinelOne is smaller in size when compared to peers like CRWD, and hence marketing expenditure is also smaller, yet the company has managed to achieve impressive revenue and ARR growth over the past few years. However, some of the key metrics have been lower than expected in the last few quarters. For instance, SentinelOne reported net new ARR in 1Q24 of $42M, which was down 10% YoY and below consensus expectations. The management iterated that the macro backdrop had a lot to do with this, as several deals slipped, and customers did not ramp their usage as much as expected. I believe the pricing from bigger players like Palo Alto Networks, Inc. (PANW) and Microsoft Corporation also played a part as businesses emphasize cost-savings amidst a tough macro environment. SentinelOne is not keen on competing on price in order to keep the gross margins stable, which I think is a good move; however, that risks competitors taking more market share. I will be observing the net new ARR figure going forward, and if the number continues to fall below expectations, I will become more cautious on my bullish stance.
Conclusion
SentinelOne has positioned itself as a leading provider of next-generation EDR solutions. The company is taking proactive measures to optimize costs and reach its profitability targets in a sensible manner. I believe SentinelOne is in a favorable position to achieve substantial margin expansion, both in terms of gross and operating margins. The company's strong market presence enables it to continue gaining market share in the Endpoint security market, explore opportunities in related markets, and sustain impressive growth while enhancing its fundamental performance. I view the stock as a buy at current levels and have an end-of-year price target of $20 on the stock.
