SentinelOne (NYSE: S) margins are lagging, which may pose a risk for the future


Tuesday SentinelOne, Inc. (NYSE: S) released its third quarter results, which received a mixed reaction from the market on Wednesday. The stock price initially fell 15%, but then recouped most of those losses to close 5% lower for the day. While the company still manages triple-digit revenue growth, its margins are lower than its peers. Lower margins should be taken into account when considering the current valuation.

Highlights of the third quarter:

  • Revenue up 128% to $ 56 million, $ 6 million more than expected.
  • Annual recurring revenue up 131% to $ 237 million
  • Non-GAAP EPS of $ -0.15 was $ 0.03 higher than expected.
  • GAAP EPS of $ 0.26 was as expected.

Is the assessment justified?

The growth rate remains impressive and helps SentinelOne catch up with its larger peers. However, the current valuation anticipates much higher growth, even after the stock price has fallen 25% since March.

See our latest review for SentinelOne

As the following graph illustrates, SentinelOne is still a long way from profitability. In fact, the net loss is expected to widen over the next year and only start to decrease in 2024 and beyond. This means that whoever invests in the business now pays for profits that will not materialize for a while. Now that the market is paying more attention to inflation, future profits are discounted at a higher rate.

NYSE: S Profit and Revenue Growth December 9, 2021

There is not enough visibility into the potential for future earnings to estimate a value for the stock, and because the business is unprofitable, a price / earnings ratio does not make sense. In situations like this, the best we can do is compare the price / sales ratio of the company to that of its peers, as well as the rate of revenue growth and margins.

Society

Price / Sales

Growth Rev

Gross margin

Operating margin

SentinelOne

87x

128%

62%

-119%

CrowdStrike

38x

36%

74%

-ten%

Cloudflare

89x

51%

78%

-62%

ZScaler

58x

56%

77%

-32%

Okta

32x

61%

71%

-53%

SentinelOne’s price / sales ratio is much higher than that of similar companies, although this is supported by the much higher growth rate. However, it has a significantly lower gross margin, and a very large loss at the operating level. Ultimately, the price of a stock should reflect the potential for earnings, so these margins are important.

Income growth will inevitably slow down and when that happens, profitability will need to improve. At the same time, the cloud security market is becoming very competitive and the company may have to increase its spending to increase its market share.

What this means for you:

The market becomes much more sensitive to inflation and the possibility of higher interest rates. This means that growing businesses must demonstrate their ability to generate profit, rather than grow at any cost.

It should be noted that SentinelOne improved its gross margin compared to the previous quarter. Over the next few quarters, margins should be an area of ​​interest. Ideally, the company should continue to increase its revenues without increasing its expenses and at the same time improve its gross margin.

This article only discusses SentinelOne’s margins when it comes to valuation and growth. If you want to better understand the business, take a look at our full SentinelOne review, which includes some of the other factors and risks to consider.

If you are no longer interested in SentinelOne, you can use our free platform to view our list of over 50 other stocks with high growth potential.

Richard Bowman, analyst at Simply Wall St, and Simply Wall St have no positions in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents.


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