Artificial intelligence (AI) is forecast to drive a productivity boom across the global economy, but it's also dangerous when placed in the wrong hands. According to a survey conducted by PwC earlier this year, 64% of leading corporate executives think AI will increase cybersecurity risks in their organizations.
Cybersecurity giant Palo Alto Networks(NASDAQ: PANW) recently said it has seen a tenfold increase in email-based phishing attacks over the past year because AI allows malicious actors to rapidly craft realistic content designed to trick corporate employees into handing over sensitive information. So the executives' fears are well founded.
Navigating this evolving threat landscape requires advanced protection. SentinelOne (NYSE: S) offers a portfolio of cybersecurity software that utilizes on AI-driven automation to identify threats and respond to problems.
SentinelOne stock is trading down 68% from its all-time high, set during the tech frenzy in 2021. Partly because of that drop, the stock now trades at a very attractive valuation relative to SentinelOne's cybersecurity peers. Here's why it might be a buy right now.
AI-based cybersecurity is the future
SentinelOne developed the Singularity platform, a holistic solution designed to protect cloud networks, employee identities, and endpoints. It's packed with AI-powered features because the company believes machines react faster than humans and wants to automate as much of the cybersecurity stack as possible.
Storyline is one unique feature within Singularity. It autonomously tracks security events and creates a timeline for managers to review so they can rapidly trace each incident back to its source. That reduces the time managers spend on manual investigations and allows them to act faster. In the event of an attack, they can use the one-click remediation tool to easily roll a network back to its pre-breach state.
Last year, SentinelOne launched Purple AI to make Singularity even more powerful. It's an AI-powered virtual assistant that can be prompted with natural language to hunt for threats, summarize incidents, and offer remediation assistance. In other words, it can turn almost any employee into a cyber expert. Early adopters of Purple AI said it speeds up threat hunting and incident investigations by a whopping 80%.
During its fiscal 2025 second quarter (ended July 31), SentinelOne launched a new feature for Purple AI called Alert Summaries. Simply put, the platform autonomously summarizes security alerts -- complete with contextual information -- so managers can make more informed decisions about whether they require urgent attention.
Investors should expect to see SentinelOne further expand Purple AI over time, because the company says adoption is already surpassing its expectations.
Image source: Getty Images.
SentinelOne's revenue is growing quickly
SentinelOne generated $199 million in revenue during Q2. It was a 33% increase from the year-ago period, and also comfortably above management's guidance of $197 million.
That was much faster than the revenue growth generated by Palo Alto Networks (12%) and CrowdStrike(NASDAQ: CRWD) (32%) in their recent quarters. While it's easier for SentinelOne to grow more quickly because it's a smaller company with less revenue, this still suggests it's taking some market share from its two rivals in the AI-powered cybersecurity space.
SentinelOne also achieved an important profitability milestone during Q2. The company generated a net loss of $69.2 million on a GAAP basis, which was an improvement from the $89.5 million it lost in the year-ago period. However, it generated a positive non-GAAP net income (of $3.5 million) for the first time in its history.
Non-GAAP figures exclude one-off and non-cash expenses like acquisition costs and stock-based compensation, so SentinelOne technically hasn't achieved "true" profitability. However, the company's Q2 result was a step in the right direction.
SentinelOne stock looks cheap by one valuation metric
SentinelOne generated $723 million in revenue over the last four quarters, so based on its market capitalization of $7.7 billion, its stock trades at a price-to-sales (P/S) ratio of 10.8.
That's significantly below SentinelOne's average P/S ratio of 27.9 since the company came public in 2021. I'm not suggesting it will get back there because that level is quite expensive, and it's skewed by the fact that it briefly traded at more than 100, which is a ludicrous valuation.
However, the 68% decline in SentinelOne stock, combined with the continued growth in the company's revenue since then, has brought its P/S ratio down to a more reasonable level. In fact, SentinelOne is notably cheaper than both Palo Alto and CrowdStrike:
Typically, a company that is growing its revenue faster than its peers attracts at least an equal valuation, and maybe even a premium one. Perhaps Palo Alto and CrowdStrike are receiving more credit from investors because they are the cybersecurity industry leaders. However, CrowdStrike is coming off one of the worst outages in modern history, which cost its customers an estimated $5.4 billion.
SentinelOne says that event prompted a heightened interest in its Singularity platform and that some of the largest enterprises in the world have since evaluated its products (with positive results).
But even apart from CrowdStrike's troubles, SentinelOne should experience growing demand for its platform based purely on the evolving threat landscape. Over time, I think it will close the current valuation gap with its competitors.
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Anthony Di Pizio 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.
