SentinelOne(NYSE: S) released its latest earnings report on Aug. 27. In its fiscal 2025 second quarter, which ended on July 31, the AI-driven cybersecurity company's revenue rose 33% year over year to $198.9 million and exceeded analysts' estimates by $1.5 million. Its adjusted earnings of $0.01 per share also topped the consensus forecast of a breakeven result -- a big improvement from its adjusted loss of $0.23 per share a year ago.
Those headline numbers were impressive, but SentinelOne's stock remains more than 30% below its IPO price of $35 from June 2021. Should investors buy this oft-overlooked cybersecurity stock instead of larger competitor CrowdStrike(NASDAQ: CRWD), which inadvertently triggered a major global IT outage with a software update in July.
Image source: Getty Images.
How fast is SentinelOne growing?
SentinelOne's Singularity XDR (extended detection and response) platform relies on artificial intelligence algorithms instead of human analysts to counter cybersecurity threats. Its view is that an automated approach is faster, more efficient, and less prone to errors.
Unlike CrowdStrike, which only runs its Falcon endpoint security platform as a cloud-native service, SentinelOne runs Singularity across a mix of on-site appliances and cloud-based services. That hybrid approach will allow its clients to continue using its services even if a cyberattack disables their internet connections.
SentinelOne's revenue more than doubled in fiscal 2021, fiscal 2022, and fiscal 2023, but it lost momentum in fiscal 2024 (which ended in January) as its growth in revenue, annual recurring revenue (ARR), and larger customers cooled while its dollar-based net revenue retention rate declined.
Metric | Fiscal 2021 | Fiscal 2022 | Fiscal 2023 | Fiscal 2024 |
|---|---|---|---|---|
Revenue growth | 100% | 120% | 106% | 47% |
ARR growth | 96% | 123% | 88% | 39% |
Growth in customers with $100,000+ in ARR | 109% | 137% | 74% | 30% |
Dollar-based net revenue retention rate | 117% | 129% | 132% | 114% |
Data source: SentinelOne.
In the first six months of its fiscal 2025, SentinelOne's revenue rose 36% year over year, its ARR grew 32%, and the number of larger customers increased by 24%. Management expects its revenue to rise by 31% to $815 million for the full year.
SentinelOne mainly attributed the slowdown to macroeconomic headwinds that made it tougher to gain new customers and cross-sell additional services to established ones. But CrowdStrike, which recently lowered its outlook to account for the impacts of the global IT outage it caused, still expects its revenue to rise by 27% to 28% to about $3.9 billion in its fiscal 2025 (which will end in January).
It's generally a bad sign for an underdog if it's barely growing faster than the market leader. That outlook also suggests that CrowdStrike's near-term pain won't necessarily generate any meaningful gains for SentinelOne. Instead, bigger and more diversified cybersecurity giants like Palo Alto Networks -- which offers a mix of on-site, cloud, and AI services -- might have better shots at luring away some of CrowdStrike's disenchanted customers.
Will SentinelOne ever turn a profit?
SentinelOne generated a slim adjusted net profit in the second quarter of fiscal 2025 as it realized some one-time gains, but its adjusted operating margin was still negative.
The company expects to post an adjusted operating margin of negative 3% to negative 5% for the full fiscal year, which would be a significant improvement from its adjusted operating margins of negative 19% in fiscal 2024 and negative 49% in fiscal 2023. Those are certainly steps in the right direction, but SentinelOne will likely remain deeply unprofitable on a generally accepted accounting principles (GAAP) basis for the foreseeable future. CrowdStrike and Palo Alto Networks are both firmly profitable on a GAAP basis.
SentinelOne still held $708 million in cash, cash equivalents, and short-term investments at the end of the second quarter. Its low debt-to-equity ratio of 0.4 also gives it ample room to raise fresh cash, but investors should be aware that the company increased its share count by 20% over the past three years via stock-based compensation. It won't go bankrupt anytime soon, but the red ink and ongoing shareholder dilution could limit the stock's appeal if interest rates stay elevated.
Should investors buy SentinelOne instead of CrowdStrike?
With an enterprise value of $7.1 billion and a valuation of 9 times this year's sales, SentinelOne still isn't cheap. CrowdStrike might seem pricier at 15 times this year's sales, but it's also larger, more profitable, and better diversified than SentinelOne.
I don't think investors should buy CrowdStrike stock until and unless it overcomes the brand damage caused by its IT outage. I wouldn't be surprised if it cuts its guidance a few more times before a clearer picture emerges of how that blunder is impacting its top and bottom lines.
That said, I don't think SentinelOne stock is a perfect portfolio replacement for CrowdStrike stock yet. SentinelOne's growth is slowing and the company hasn't broken even on a non-GAAP basis yet. It would be an interesting stock to nibble on, but I would need to see its customer growth and retention rates stabilize and its operating margins turn positive before considering it a worthy long-term investment.
Should you invest $1,000 in SentinelOne right now?
Before you buy stock in SentinelOne, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and SentinelOne wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $731,449!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of August 26, 2024
Leo Sun 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.
