Alert: 26.7% Upside In Rising Cybersecurity Star

Investment Alert: Buy SentinelOne (S) Under $16/share

Disclaimer: Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.

Every once in a while the market gifts long-term investors an opportunity. Fear takes over, share prices crash, and fundamentals get tossed out the window. And that might be exactly what’s happening now with SentinelOne, an up and coming cybersecurity firm that has been growing like a weed.

Recently, SentinelOne plunged from over $21 to around $12 per share following management’s guidance that top line growth would slow to 41% for the year. The CEO cited concerns that closing contracts was more challenging as the economic environment slowed. Wall Street didn’t hesitate to toss out the baby with the bathwater, and SentinelOne share price was nuked.

But now, it seems, an opportunity to snap up shares on sale has arrived. We investigate.

Key Points

  1. SentinelOne’s revenue growth guidance was lower than expected, due to macro headwinds and competitive pressures.
  2. Crowdstrike, SentinelOne’s main competitor, is better-capitalized and has a larger market share.
  3. Despite these challenges, SentinelOne has a strong track record of growth, remains a leader in the cybersecurity market and appears undervalued.

Why Did SentinelOne Stock Drop?

Beyond the lower forecast revenue growth guidance, SentinelOne suffered from macro headwinds and competitive pressures. Its archrival, Crowdstrike, is well capitalized and enjoys a financial and market share lead.

Crowdstrike has a fortress balance sheet with $2.8 billion in cash versus a little over $700 million for SentinelOne when factoring in cash plus short-term equivalents, down from $1.6 billion in Q1 2022.

CRWD has been growing at north of 40% year-over-year in recent quarters too, but that’s off of a large base. Most recently the company reported $692 million in quarterly revenues versus $133 million for SentinelOne.

Clearly, investors were spooked by the competitive pressures and economic headwinds facing SentinelOne. And while those concerns are valid, we believe the price has overshot to the downside.

Why SentinelOne Is A Buy?

SentinelOne top line growth has been astonishingly impressive over the past few years:

  • 2021 Q2: 108.2%
  • 2021 Q3: 121.3%
  • 2021 Q4: 128.1%
  • 2022 Q1: 119.8% 
  • 2022 Q2: 109.3%
  • 2022 Q3: 124.1%
  • 2022 Q4: 105.9%
  • 2023 Q1: 92.1%
  • 2023 Q2: 70.5%

On the back of these sky high year-over-year revenue growth figures it’s no surprise that guidance of 41% seems comparably disappointing, and so the stock has been punished.

But when we ran an analysis of where fair value sits, we found SentinelOne has been unfairly sold off. The consensus among analysts, even after downgrades, sits now at $17.96 per share while we have a slightly more optimistic target of $18.43 based on a discounted cash flow forecast analysis.

With 10,000 customers, including Fortune 500 firms, SentinelOne has a strong base of clientele to support revenues for the foreseeable future, and we view the latest share price dip as an opportunity to buy shares on sale.

Even if the 2021 highs approaching $80 per share are not in sight anytime soon, we wouldn’t be surprised to see the share price pop back above fair value into the $20s in the near future.