What Happened:
Shares of cyber security company SentinelOne (NYSE:S) jumped 10.8% in the pre-market session after peer, CrowdStrike reported fourth-quarter results with revenue and ARR (annual recurring revenue) beating by a slight margin but very convincingly on operating profit. Keeping with that theme, while forward guidance for the next quarter and the full year were only slightly above expectations, non-GAAP EPS guidance was more convincingly ahead, showing better-than-expected profitability.
Lastly, Palo Alto Networks (NASDAQ:PANW) warned of weakness in security spending a few weeks ago when it reported earnings, sending waves of caution across the sector. Cybersecurity peers that reported after Palo Alto put up mixed results, which kept investors on edge for CrowdStrike's results.
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What is the market telling us:
SentinelOne's shares are very volatile and over the last year have had 29 moves greater than 5%. But moves this big are very rare even for SentinelOne and that is indicating to us that this news had a significant impact on the market's perception of the business.
The previous big move we wrote about was 14 days ago, when the company dropped 11.7% as cybersecurity stocks fell after industry stalwart, Palo Alto Networks reported fourth-quarter results and lowered full-year guidance for revenue and billings, with both metrics also falling below Wall Street's expectations. This is never a good sign. Furthermore, billings and revenue guidance for next quarter also missed Wall Street's estimates, with EPS below as well.
Palo Alto Networks highlighted many challenges during the quarter, including 1.) weakness in the U.S. federal vertical, which impacted billings and revenue growth, and 2) Customers' conservativeness regarding upfront cash payments. The long-term demand forecast provided was also concerning as management highlighted the possibility of "a period of 12 to 18 months of pressure on our top-line growth rates, notably billings."
In addition, the top-line growth metrics are expected to be impacted by the company's shift towards a "platformization" strategy, which will make it easier for customers to consolidate their usage of cybersecurity solutions and provide the possibility of accessing some products for free in the early adoption phase. Under this strategy, Palo Alto Networks noted that a typical customer adopting the platform " will not pay us for our technology for a period of time. As these programs ramp over the next year, we expect a change to our billings and revenue growth for the next 12 to 18 months." This strategy may drive more competition within the cybersecurity space as industry players adjust their pricing/product strategies to stay competitive.
Overall, this was a weaker quarter for Palo Alto Networks, with the poor guidance highlighting several issues within the business as well as potential challenges for cybersecurity players in the coming quarter.
SentinelOne is up 3.5% since the beginning of the year, but at $26.81 per share it is still trading 10.6% below its 52-week high of $30 from February 2024. Investors who bought $1,000 worth of SentinelOne's shares at the IPO in June 2021 would now be looking at an investment worth $630.12.
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