Last December, I thought shares of cybersecurity provider SentinelOne were under-valued. My reasoning was that the stock traded 80% below its peak despite triple digit revenue growth.
While SentinelOne’s shares are about where they were last December, a recent report that Wells Fargo had downgraded its stock made me wonder whether its torrid growth could continue. That’s because Wells Fargo changed its rating due to a drop off in demand for SentinelOne’s product among channel partners and the bolting of two executives to a rival.
SentinelOne said that the data from channel checks is “noisy and unreliable” and that it has a strong team and an excellent strategy for sustaining its rapid growth. After a February 17 interview with CEO Tomer Weingarten, the logic underlying its growth strategy seems compelling to me.
On March 14, SentinelOne will report its results for its January 2023-ending fourth quarter — letting the world know whether it beat its 105% growth forecast, made strong progress on its path to profitability, and is raising its investor guidance.
If that happens, its stock should soar.
(I have no financial interest in the securities mentioned in this post).
Wells Fargo Downgrades SentinelOne
Wells Fargo downgraded SentinelOne stock from Overweight to Equal Weight. According to Investing.com, on February 21, Wells Fargo analysts set a price target of $18 — still some 20% above its current price — on “demand concerns.”
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Wells Fargo highlighted two issues — a drop in demand from resellers and the departure of two senior SentinelOne executives for rival, Crowdstrike — that will make it “more difficult to reach material profitability.”
The report noted that reseller trends "significantly downticked" based on checks with resellers — 43% of which reported Below Plan results and just 10% Above Plan.
Wells Fargo also expressed concern that former SentinelOne Chief Marketing Officer, Daniel Bernard, and Chief Product Officer, Raj Rajamani, had left for Crowdstrike. “Both executives are highly regarded in the industry, as a number of channel partners we have spoken with have cited the departures as concerning,” according to Wells Fargo.
SentinelOne does not put much credence on channel checks. On February 23, a SentinelOne spokesperson said, “We do not comment on channel checks, especially before we report our earnings. In general, channel checks cause a lot of noise, are not statistically significant, and rarely tell a full, accurate picture.”
SentinelOne is confident in its products. As Weingarten said, “We are serving a critical enterprise need with leading protection and detection technology. At the same time, due to our application of AI, ease of use, and pricing transparency, customers are buying our Singularity extended detection and response (XDR) platform across endpoint, cloud and identity delivers value to enterprises.”
SentinelOne is grateful for the contributions of the departing executives. “While we decline to comment on why they left, we thank Daniel and Raj for their support in establishing the SentinelOne brand, and for building world-class marketing and product teams,” he said.
Its new marketing team is executing well. “Six months ago, we transitioned our product organization to our long-time CTO Ric Smith. On February 22, we announced the appointments of Jane Wong as SVP of Product Management, and Lana Knop as VP of Product Management. Ric is working closely with them and other product leaders to move our marketing and product teams forward,” Weingarten concluded.
SentinelOne’s Expectations-Beating Performance and Prospects
SentinelOne’s most recent financial report — for the quarter ending October 2022 — exceeded expectations. As I wrote in December, the company’s revenues jumped 106% to $115.3 million — more than $5 million above the consensus
It was losing money — but less than investors expected. Specifically, its loss before costs such as stock compensation of 16 cents per share was seven cents a share better than analysts expected.
SentinelOne also raised its forecast for the quarter that ended in January 2023 above expectations. Specifically, the company estimated that its fiscal Q4 revenue would reach $125 million — $400,000 more than analysts expected. Moreover, the company estimated that its fiscal year 2023 revenue would rise 105% to $420.5 million. SentinelOne expects to reach profitability by 2025.
SentinelOne was proud of the result while warning that softening macroeconomic conditions could limit its growth. As Weingarten said in a statement, strong “adoption of Singularity [enables us] to deliver superior platform value. [However, due to macroeconomic headwinds,] we’re seeing higher cost consciousness and prudence around IT budgets.”
How SentinelOne Sustains Triple-Digit Growth
While investors understandably react strongly to whether a company delivers expectations-beating growth every quarter, there are other important factors to consider in assessing a company’s value.
In my view, one of the most important is whether a company is winning customers and getting them to buy more over time. SentinelOne is doing that.
As SiliconAngle reported in December, “SentinelOne’s customer count rose 55%, to more than 9,250 customers, and customers with ARR over $100,000 doubled to 827 by the end of October 2022. The dollar-based net retention rate [— a measure of recurring revenue from existing customers —] was 134% [over 120% is considered excellent].”
Analysts have given top ratings to SentinelOne products. As Weingarten told me, MITRE ranked the company #1 in endpoint detection and response (EDR) for three years in a row. Gartner ranked SentinelOne number one for endpoint protection platforms (EPP) and Gartner Peer Reviews ranked the company #1 for EPP, EDR and Cloud Workload Protection.
How SentinelOne wins over customers
SentinelOne has a clear understanding of what it takes to win in the competition for endpoint security. As Weingarten told me, “A company’s chief information security officer is the technical decision maker and the bigger the customer, the more people that are involved. The people in procurement consider the supplier’s viability, its pricing, and the contract details. The process usually takes two to four months.”
With many of its customers looking to cut costs, their purchase criteria have evolved. “In the current market climate, technology decision-makers are being urged to remove technology that is not a must-have. We benefit from price consciousness — it’s what we do,” he said.
Customers still need to protect their information assets — they now want to do that with fewer products and a lower budget. SentinelOne says it is well positioned to replace rivals. As Weingarten explained, “Companies are consolidating on our platform. They are not looking so much for which vendor is first to market with a strong brand. Instead, they want to buy from a supplier that provides innovative solutions, delivers business value, and provides an outstanding customer experience.”
SentinelOne says it provides customers with a high return on investment because it enables them to stop buying software from providers of point solutions — such as endpoint security product from McAfee, Carbon Black, and Microsoft
SentinelOne also provides SIEM services — enabling customers to replace vendors such as Splunk “which is mostly deployed on premises and has quite a high price point. We are cloud native so we can save customers millions of dollars by retaining logs natively,” said Weingarten.
SentinelOne also has a unique approach to protecting companies against cyberattacks. As he said, “We use machine learning and analysts to deliver a better customer experience. We monitor 24 x 7 to mitigate and manage attacks with the best service level agreements in the industry,” he told me.
How SentinelOne creates new products that customers want to buy
Successful companies will fall by the wayside if they rest on their past successes. To maintain the innovation edge, CEOs must create the right culture and hire people who embrace the company’s mission and values.
SentinelOne does these things. “We win because of our culture and our people. Our North Star is to be a force for good. We have a culture of equity, relentlessness, doing the right thing, diversity, listening to people, safety for people of all colors, shapes and genders, and providing the best employment experience,” he said.
SentinelOne’s culture drives its people to keep finding ways to give customers more value — despite the company’s previous success. Some of its rivals appear to have become complacent and slow to react to change.
As Weingarten explained, “Incumbents stagnate if they can’t match the latest wave of technology. By listening to our customers — who express frustration in the endpoint. and say that the cloud is coming — we stay ahead of incumbents.”
SentinelOne derives its revenues from two markets — one of which is relatively mature and the other that is growing rapidly. As he told me, “We get 70% of our revenue from endpoint security and 30% from new growth vectors — such as cloud security which is accelerating very fast. It is a $20 billion greenfield opportunity with no incumbent and an infinite footprint.”
SentinelOne’s vision is to provide more coverage with less overhead by bundling separate products such as identity management — after acquiring a leader in the industry, cloud, and endpoint. Customers prefer this to what rivals such as CrowdStrike
To compete in the cloud security industry, SentinelOne has added new capabilities. “We added Linux skills four years ago. We also have new skills in cloud protection. The jargon is different as are the techniques for controlling performance. We still depend on our existing capabilities for threat intelligence and malware resources,” he said.
SentinelOne has an effective process for developing new products. “We have thousands of customers which gives us a unique vantage point. We have an idea, we get input from our customer advisory board that includes cloud-native companies, and we build what is absolutely necessary for them to operate in the new environment,” concluded Weingarten.
SentinelOne Prevails Over Crowdstrike In Revenue Growth
SentinelOne’s strategy for getting and keeping customers has enabled it to do well on revenue growth (+106% in the most recent quarter), while its profitability (-86% net margin) and stock price (-61% in the last year) have room for improvement.
Yet compared to Crowdstrike — with 53% revenue growth, a -9.5% net margin, and 35% drop in stock price over the last year — SentinelOne — whose revenue is 20% that of Crowdstrike’s — prevails only on the revenue growth.
Analysts at Morningstar are more bullish on Crowdstrike. Its analyst, Malik Ahmed, set a price target of $16 for SentinelOne, noting, “While we don't believe SentinelOne merits an economic moat, we believe the firm stands to benefit from secular tailwinds within endpoint security.”
Last December, Khan sounded much more excited about Crowdstrike. As he wrote, “Within the growing [endpoint security] market, CrowdStrike has emerged as a leader and we think the stickiness of its platform, Falcon, is clear in the firm’s impressive gross and net retention metrics.”
Analysts who track both companies are generally more bullish on Crowdstrike. According to CNNBusiness, 26 analysts who cover SentinelOne have a median price target of $18 — implying roughly 14% upside — that’s considerably below the 32% rise expected by the 39 analysts who cover Crowdstrike.
With Wall Street relatively pessimistic, SentinelOne stock will pop if it beats and raises next month.
