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Investment Thesis
One way to be quite sure to make alpha as a growth investor is to invest in companies that have the potential to generate more revenue than their current market cap in the long term. Given SentinelOne’s (NYSE:S) hyper-growth in the cybersecurity market (accelerating faster than a SpaceX rocket ship), with a similar track record as CrowdStrike (CRWD), I would argue that this could become a great investment over time.
Background
SentinelOne management explained during the call what separates this emerging cybersecurity powerhouse from the rest.
First, we have a single unified platform. We stand out from the crowd for being the only cybersecurity vendor that covers the essential attack surfaces of endpoint cloud and identity, powered by our proprietary data ingestion and analytics technology. That means an even more powerful user experience with complete security visibility across the enterprise all in one place.
Second, our platform is purpose-built to process all types of data at significant scale. We’re living in the petabyte era and data processing at scale is a must-have. Our Singularity platform is already running multiple petabytes of data every day in a live environment, while other vendors can merely handle a fraction of such scale in test or benchmark scenarios.
Finally, we offer unmatched data retention capabilities. Enterprises need to cost effectively retain an increasing amount of data for long periods. We’re helping them reduce operational and storage costs, while maintaining access to critical information.
In addition, I previously covered SentinelOne late last year: SentinelOne Earnings: Sell-Off A Buying Opportunity (NYSE:S). Since then, SentinelOne has acquired Attivo to expand into identity security.
Q2 Results
The results speak for themselves. Although the Attivo acquisition added some inorganic growth, SentinelOne posted its sixth consecutive quarter of triple-digit growth, with revenue up 124%. Furthermore, net retention reached an all-time high of 137%, with SentinelOne attributing its channel network and partners. Lastly, SentinelOne has been able to combine both growth and profitability by achieving a Rule of 60 (compared to 40 benchmark).
ARR (annual recurring revenue) grew 122% to $439M, adding $100M in a single quarter. Attivo is on track for $45M ARR by the end of the year, so the ARR is a bit inflated given the inorganic component. Further, profitability improved by 42 points YoY to a negative 57% operating margin.
Guidance
SentinelOne yet again exited the quarter with its largest ever pipeline, and initiated guidance for $111M or 98% growth. If there’s any blemish to be found in the earnings report, it’s probably the net new ARR guidance, which seems roughly flat to down sequentially to high $50M. SentinelOne attributed this to the macro environment.
Full-year guidance has been increased to 103% growth to $416M.
SentinelOne vs. CrowdStrike
As mentioned, ARR (annual recurring revenue) grew 122% to $439M, adding $100M in a single quarter. For comparison, in Q4 2019 competitor CrowdStrike reported a record net new ARR of $99M, ending the year at $600M, up 92%.
However, Attivo likely contributed around $35-40M in inorganic ARR, given the $45M exit guidance, which implies the organic net new ARR was at least $60M. For comparison, in Q2’19, three years ago, CrowdStrike delivered $429M ARR (104% growth) by adding $59M sequentially. This shows how similar both companies are, although it seems CrowdStrike was more focused on customer acquisition as its net retention was “over 120%”.
CrowdStrike IPOd in mid-2019 at a bit above $10B market cap, and aside from a brief COVID dip, would go on to trade between $10B and $20B market cap for the next year, and would then go on to surge to over $60B.
While, obviously, the public market attitude has changed considerably since the 2020-21 heydays, there is no a priori reason why SentinelOne couldn’t continue to match (or beat) the growth curve that CrowdStrike has already demonstrated.
Even if the market remains hesitant to give SentinelOne the same valuation multiple, the solution would be to simply stay invested and let SentinelOne deliver the growth over time. There are only so many quarters that a company can deliver hyper-growth, with the market response being to just compress the valuation P/S multiple.
Valuation
As indicated in the previous section, SentinelOne with its current market cap of about $7B is lower than CrowdStrike has ever been – aside from the COVID dip. In addition, as argued both companies have a very similar growth profile, with no reason to expect this will not remain the same going forward, give or take. Overall, this means investors who missed the CrowdStrike battleship get the chance to invest in the SentinelOne rocket ship as a nearly equal equivalent of CrowdStrike three years ago while also have a much more compelling valuation to boot.
In absolute terms, SentinelOne is on the brink of crossing the $500M ARR mark, which means it is valued at just over 12x ARR. Keep in mind that at a triple-digit growth rate, in one year the valuation could be slashed to around 6x ARR if the stock doesn’t move.
For comparison, a company like UiPath (PATH) has about double the ARR and currently a slightly higher market cap. Nevertheless, while UiPath also has a strong track record of growth, given enough time of hyper-growth, and SentinelOne may perhaps surpass UiPath in ARR. As another comparison, Snowflake (SNOW) whose growth has decelerated below triple digits, still has an over 25x P/S valuation, twice as high as SentinelOne. Lastly, Asana (ASAN) has also crossed $500M ARR recently and is valued at around 10x ARR. However, Asana has guided to around 40% growth, so SentinelOne is just a bit more expensive while having over twice the growth rate.
Risks
The main risk is the lure of comparing SentinelOne to CrowdStrike. If for some reason, the long-term growth trend starts deviating, then this could also impact the stock performance. Nevertheless, the 137% net retention and record pipeline and customer acquisition all point to continued strong performance.
In addition, the macro environment is also different compared to three years ago, with generally lower P/S multiples due to higher inflation and interest rates. However, this could provide upside due to multiple expansion in the future if the environment would improve.
Investor Takeaway
What is better than going to space? Delivering extraterrestrial returns for your portfolio (while remaining at ground altitude). That is exactly what I would predict the SentinelOne rocket ship may do. It is gaining altitude at about 100% per year currently, and given that it is operating in the mission-critical space of cybersecurity as a next-gen industry leader, hyper-growth may well continue for quite a long time.
That is indeed what one such public company has already done so before over the last three years, called CrowdStrike, Although this stock and company has been a veritable battleship of its own, a comparison has shown that SentinelOne actually slightly edges out in terms of growth and comfortably wins in terms of valuation. CrowdStrike, three years later, is currently executing towards its goal of $5B ARR (at a still quite blistering pace). As another data point, a while ago I heard that Microsoft’s (MSFT) security business is over $10B in size.
Given how mission-critical cybersecurity is and will remain, and the acclaim SentinelOne has consistently received over time for its offering, there seems a real likelihood S may mimic those performances. Of course, never put too much money on a rocket ship, lest it explodes. But for now, the market drawdown has provided a very great opportunity.
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