SentinelOne Earnings: Start to Fiscal 2024 Leaves Plenty Lacking

We are lowering our fair value estimate for no-moat SentinelOne S to $14 from $16 after the firm reported a weak quarter with worse-than-expected top-line results to begin fiscal 2024. Looking beyond this quarter, increasing macro pressures also made management reduce its sales outlook for fiscal 2024. Some of our fair value estimate reduction was offset by better-than-expected profitability for the quarter. While we believe there is a long-term growth opportunity for SentinelOne to capitalize on within endpoint security, we’d caution investors that the firm is an up-and-coming challenger in the endpoint space dominated by larger, well-entrenched vendors like CrowdStrike and Microsoft. With shares falling sharply after the earnings report, we believe SentinelOne’s shares are fairly valued. For investors looking for cybersecurity exposure, we’d highlight Zscaler, a high-quality cybersecurity vendor trading in the 4-star territory.

SentinelOne’s first-quarter sales came in at $133 million, up 70% year over year, and below our $137 million estimate. While key customer metrics such as net retention and ARR continued to project strength, we were left disappointed by both the miss on the top line and the reduction in management’s fiscal 2024 sales guidance (at the midpoints) to $595 million from $636 million. The cherry on top of these poor financial results was SentinelOne finding inaccuracies in how the firm recorded annual recurring revenue, or ARR, leading to a reduction of $27 million in the previous quarter’s ARR and a similar downward adjustment in the other three quarters of fiscal 2023.

While such execution-related missteps can occur with young companies, the problems at SentinelOne are being magnified by a hostile macro environment with elongated sales cycles as well as a tough competitive landscape as the nascent firm competes with the well-oiled business machines at CrowdStrike and Microsoft.