SentinelOne (NYSE:S) Reports Strong Q3 But Stock Drops

Full Report / December 07, 2021
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Cyber security company SentinelOne (NYSE:S) announced better-than-expected results in the Q3 FY2022 quarter, with revenue up 128% year on year to $56 million. Guidance for next quarter's revenue was surprisingly good, being $60.5 million at the midpoint, 7.01% above what analysts were expecting. SentinelOne made a GAAP loss of $68.5 million, down on its loss of $30.1 million, in the same quarter last year.

SentinelOne (S) Q3 FY2022 Highlights:

  • Revenue: $56 million vs analyst estimates of $49.5 million (12.9% beat)
  • EPS (non-GAAP): -$0.15 vs analyst estimates of -$0.18
  • Revenue guidance for Q4 2022 is $60.5 million at the midpoint, above analyst estimates of $56.5 million
  • Free cash flow was negative $20.6 million, compared to negative free cash flow of $44.7 million in previous quarter
  • Net Revenue Retention Rate: 130%, up from 125% previous quarter
  • Customers: 6,000, up from 5,400 in previous quarter
  • Gross Margin (GAAP): 63.6%, up from 57.8% same quarter last year

With roots in the Israeli cyber intelligence community, SentinelOne (NYSE:S) provides software to help organizations efficiently detect, prevent, and investigate cyber attacks.

Cyber attacks are costly for organizations, as they lead to the loss of sensitive information, destruction of assets, and a diminished brand image. While organizations invest in tools and devices to prevent cyber threats, they still get breached due to their reliance on old security solutions that are slow, don't scale, don't talk to each other and are often unable to keep up with the new threats.

SentinelOne's software allows organizations to monitor all their online assets and networks, and to automate the process of defending against cyber attacks. Its main promise is speed and autonomy, its machine learning based system is able to automatically not only identify an attack, but also block and remediate it and its detection capabilities run locally and don't depend on any cloud-based connections, which reduces the response time even further.

Once the SentinelOne software is installed on a system such as a laptop or a web server, it can identify every IT asset within the organization. It then connects signals and data from these assets in one place where further analysis is performed to detect security threats. SentinelOne also provides analysts with detailed information on malicious software and processes running on a network by proactively searching for suspicious activities. This makes it faster and more efficient for organizations to investigate cyber attacks.

The cyber attack surface is projected to expand as the volume of internet enabled devices grows. Given the scarcity of cyber security talents, more organizations are expected to adopt automated cybersecurity platforms to efficiently manage cyber attacks and to stay up to date with the threat landscape.

SentinelOne faces competition from legacy security platforms who are shifting to modern cloud offerings such as Microsoft (NASDAQ:MSFT), Palo Alto Networks (NYSE:PANW) and McAfee (NASDAQ:MCFE) as well as cloud-native innovators such as CrowdStrike (NASDAQ:CRWD).

Sales Growth

As you can see below, SentinelOne's revenue growth has been incredible over the last year, growing from quarterly revenue of $24.5 million, to $56 million.

SentinelOne Total Revenue

This was another standout quarter with the revenue up a splendid 128% year on year. On top of that, revenue increased $10.2 million quarter on quarter, a very strong improvement on the $8.35 million increase in Q2 2022, and a sign of re-acceleration of growth, which is very nice to see indeed.

Analysts covering the company are expecting the revenues to grow 70.3% over the next twelve months, although estimates are likely to change post earnings.

Product Success

One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.

SentinelOne Net Revenue Retention Rate

SentinelOne's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 130% in Q3. That means even if they didn't win any new customers, SentinelOne would have grown its revenue 30% year on year. Significantly up from the last quarter, this is a great retention rate and a clear proof of a great product. We can see that SentinelOne's customers are very satisfied with their software and are using it more and more over time.


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. SentinelOne's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 63.6% in Q3.

SentinelOne Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.63 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.

Key Takeaways from SentinelOne's Q3 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on SentinelOne’s balance sheet, but we note that with a market capitalization of $11.9 billion and more than $1.66 billion in cash, the company has the capacity to continue to prioritise growth over profitability.

We were very impressed by the strong improvements in SentinelOne’s gross margin this quarter. And we were also excited to see that it outperformed Wall St’s revenue expectations. Zooming out, we think this impressive quarter should have shareholders feeling very positive. But the market was likely expecting more and the company is down 7.58% on the results and currently trades at $47.28 per share.

Is Now The Time?

SentinelOne may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although we have other favorites, we understand the arguments that SentinelOne is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last two years. And while its gross margins show its business model is much less lucrative than the best software businesses, the good news is its customers are increasing their spending quite quickly, suggesting that they love the product.

SentinelOne's price to sales ratio based on the next twelve months of 47.6x indicates that the market is definitely optimistic about its growth prospects. There are things to like about SentinelOne and there's no doubt it is a bit of a market darling, at least for some. But we are wondering whether there might be better opportunities elsewhere right now.

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