Cybersecurity company SentinelOne, Inc. (S) in Mountain View, Calif., offers its Singularity Platform that delivers artificial intelligence-powered autonomous threat prevention, detection, and response capabilities across an organization’s endpoints and cloud workloads.

S recently announced its agreement to acquire Attivo Networks, a leading identity security and lateral movement protection company. It aims to extend its AI-powered capabilities to identity-based threats, setting the standard for XDR and accelerating enterprise zero trust adoption. The acquisition is expected to help advance SentinelOne’s portfolio and foster growth in the critical identity security category. Furthermore, the company’s quarterly results for its fiscal fourth quarter and outlook topped Wall Street’s consensus.

However, S shares declined 7% after hours on March 15, following the company’s earnings release. The stock closed the session 12% below its $35 initial public offering price at the end of June 2021. Also, the stock has slumped 31.5% over the past six months and 17.4% year-to-date to close yesterday’s trading session at $41.70. In addition, the consensus price target plunged 24% as the company’s expanding losses weighed in. Analysts are implicitly ranking the ongoing losses as a greater concern than growing revenues and have also raised their losses per share forecasts.

Click here to checkout our Cybersecurity Industry Report for 2022

Here is what could shape S’ performance in the near term:

Stretched Valuation

In terms of forward EV/Sales, S is currently trading at 25.34x, which is 659.2% higher than the 3.34x industry average. Also, its 30.09 forward Price/Sales ratio is 815.7% higher than the 3.29 industry average. S’ 8.25x forward Price/Book is 64.6% higher than the 5.01x industry average.

Poor Profitability

S’ EBITDA  and net income margins of negative 126.62% and 132.37%, respectively, are substantially lower than the 13.80% and 5.69% industry averages. Also, its 5.54% levered FCF margin is 45.7% lower than the 10.21% industry average.

S’ ROE, ROA, and ROTC of negative 40.76%, 13.28%, and 16.52%, respectively, compare with the 7.30%, 3.50%, and 4.78% industry averages.

Bleak Bottom Line

For its fiscal fourth-quarter, ending January 31, S’ revenue increased 119.8% year-over-year to $65.64 million, topping the consensus estimate by $4.95 million. However, its loss from operations rose 91.9% from its year-ago value to $71.09 million. The company’s non-GAAP net loss came in at $43.98 million, indicating a 38.5% increase from the prior-year quarter. Its non-GAAP net loss per share was $0.17, compared to the $0.84 year-ago value, beating the $0.18 consensus amount.

EPS Expected to Remain Negative

Analysts expect the company’s revenue and EPS to come in at $74.66 million and negative $0.24m respectively,  in its fiscal first quarter, ending April 30, 2022. Its revenue is expected to grow 85.3% in the next quarter, 75.8% in the following quarter, and 80.6% in the current fiscal year. However, its EPS is expected to decline 4.3% in the next quarter and 22.4% in the quarter ending Oct. 31, 2022. S’ EPS for the fiscal year is expected to improve 25.9% year-over-year but come in at negative $0.76. And it is expected to decrease 7.3% per annum over the next five years.

The company expects revenue of $366 million – $370 million, an adjusted gross margin of 65% – 67%, and an adjusted operating margin of negative 60% – 55%.

Unfavorable POWR Ratings

S has an overall F rating, which translates to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a D grade for Quality, consistent with its negative profit margins.

S has a D grade for Value. Its stretched valuations justify this grade.

Of the 30 stocks in the F-rated Software – Security industry, S is ranked #28.

Beyond what I have stated above, one can also view S’ grades for Sentiment, Growth, Momentum, and Stability here.

Bottom Line

S has been investing in portfolio expansion and partnering with prominent players to enhance its offerings in enterprise security over the past months. The company’s expanding customer base and growing market reach should enable it to deliver solid top-line growth. But its extensive investment in growth is eating away at its bottom line. Also, considering its negative ROE, we think it could be wise to avoid the stock now.

How Does SentinelOne, Inc. (S) Stack Up Against its Peers?

While S has an overall POWR Rating of D, one might want to consider investing in the following Software – Security stocks with a B (Buy) rating: Radware Ltd. (RDWR), Trend Micro Incorporated (TMICY), and Check Point Software Technologies Ltd. (CHKP).

Click here to checkout our Cybersecurity Industry Report for 2022

S shares rose $0.30 (+0.72%) in premarket trading Thursday. Year-to-date, S has declined -17.41%, versus a -6.27% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

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