SentinelOne Stock Is Down 41% From Its 52-Week High. Time to Buy?
Shares of cybersecurity specialist SentinelOne (NYSE: S) have been under pressure following a mixed first-quarter earnings report. While the company beat expectations, a slight revision to guidance by management appears to have disappointed the market. The stock is now down 41% from its 52-week high.
Despite the volatility, investors should not lose sight of the company's positive long-term outlook. There are several reasons to stay bullish on SentinelOne, which continues to deliver industry-leading growth and is on track to reach profitability.
Is that enough to make shares of SentinelOne a good addition to your portfolio now? Here's what you need to know.
AI features powering industry-leading growth
SentinelOne is recognized as a leader in Extended Detection and Response (XDR). This cybersecurity field deals with gathering and analyzing data across an organization's IT ecosystem to actively protect against potential threats.
The company stands out through its emphasis on artificial intelligence (AI) automation, which has been a focus of its Singularity platform even before the company's 2021 initial public offering.
Image source: Getty Images.
While competitors have rushed to add AI features in recent years, SentinelOne is a pioneer in this area and claims to have one of the industry's most advanced AI-powered security platforms. Recent innovations include "Purple AI," which incorporates generative AI that management sees as a demand driver.
That dynamic has translated into strong growth, allowing SentinelOne to capture market share from larger competitors, like Palo Alto Networks or CrowdStrike. In its fiscal 2025's first quarter (ended April 30, 2024), SentinelOne posted revenue growth of 39.7% year over year, outpacing the industry.
The top-line momentum, coupled with efforts to control costs, is evident as total expenses have declined as a percentage of revenue. The non-GAAP operating margin narrowed to a negative 6% this quarter, from a negative 38% in Q1 2024.
Notably, adjusted earnings per share (EPS) in Q1 at $0.00 came in above the average Wall Street estimates of -$0.05. Even more impressively, SentinelOne generated $33 million in Q1 free cash flow, the company's first-ever positive quarter.
S Revenue (Quarterly YoY Growth) data by YCharts
SentinelOne's earnings outlook
Overall, the headline numbers suggest a strong start to the year with the company making progress toward delivering profitable growth.
On the other hand, the updated full-year revenue outlook -- between $808 million to $815 million, trimmed from the previously forecast $812 million to $818 million forecast -- likely explains the poor stock price trading action. In the letter to shareholders, management cited a "dynamic macroeconomic environment" affecting corporate IT budgets, resulting in a small effect on the cadence of sales.
Any time a company rolls back guidance, it is understandable that a tone of caution can set in. At the same time, it's important to recognize that the current forecast represents a solid 30% or so increase from 2024.
The big picture defined by firming margins and improving cash flows hasn't changed. According to the consensus estimates, SentinelOne is expected to reach positive adjusted EPS this year of $0.04, reversing the loss of $0.28 in fiscal 2024. The momentum is seen accelerating with an EPS forecast of $0.23 by 2026 and $0.44 by 2027.
So while the stock's valuation of nearly 450 times its current-year earnings forecast can create sticker shock for some investors, I believe the premium is justified given the earnings path. The P/E ratio has room to normalize as the business scales.
Even looking out toward next year, SentinelOne's implied one-year forward P/E of 78 is already in line with CrowdStrike's. There's a case to be made that SentinelOne deserves an even wider premium, given its stronger growth and leadership within AI-powered XRD cybersecurity. The upside is that earnings can outperform expectations. Management's ability to pull strategic levers in support of profitability should be rewarded by the market.
S PE Ratio (Forward 1y) data by YCharts
Should you invest in SentinelOne now?
Cybersecurity is more important than ever, and SentinelOne remains well-positioned to benefit from companies investing in their digital infrastructure. While keeping the stock in a speculative category, I see a good chance that shares of SentinelOne will be trading higher by this time next year.Should you invest $1,000 in SentinelOne right now?
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*Stock Advisor returns as of June 24, 2024Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike and Palo Alto Networks. The Motley Fool has a disclosure policy.
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