SentinelOne Earnings: Execution Appears To Be Improving as Macro Conditions Stabilize

We are maintaining our $14 fair value estimate for no-moat SentinelOne S after the firm closed out a strong quarter with sales and profitability ahead of management’s prior guidance. Despite the strong financial results, when we zoom out and look at the broader market SentinelOne competes in, we view the firm as a small player in the endpoint space dominated by larger, well-entrenched vendors like CrowdStrike and Microsoft. With shares trading marginally up after the earnings report, we view SentinelOne as marginally overvalued and would advise investors to look at higher-quality, moaty names in the security space as potential investment opportunities.

SentinelOne’s second-quarter sales clocked in at $149 million, up 46% year over year. The firm’s annual recurring revenue expanded 47% year over year to $612 million. To provide some context on the competitive landscape SentinelOne faces, its closest competitor, CrowdStrike, has an ARR of close to $3 billion, growing at almost 40% year over year, all while generating strong cash flows from its business. While SentinelOne’s growth is a testament to its strong platform and AI-led solutions, the company will have to execute flawlessly for the foreseeable future to be a long-term winner in the broader endpoint security space.

While management raised fiscal 2024 sales guidance to $605 million from $595 million guided in the last quarter, the target is still more than $30 million short of the firm’s initial 2024 forecast at the end of fiscal 2023. The substantial downward revision was due to the tough macroenvironment magnifying the impact of execution-related missteps by the firm. From an execution standpoint, we believe the firm is improving and management’s decision to focus more on profitability is a sound one.

SentinelOne’s adjusted margins for the second quarter came in at negative 22%, up significantly from negative 57% a year ago as the firm continues to optimize its spending in a tough macro environment.