SentinelOne (S)

Cyber security company SentinelOne (NYSE:S) reported Q4 CY2024 results beating Wall Street’s revenue expectations, with sales up 29.5% year on year to $225.5 million. On the other hand, next quarter’s revenue guidance of $228 million was less impressive, coming in 3.3% below analysts’ estimates. Its non-GAAP profit of $0.04 per share was $0.03 above analysts’ consensus estimates.

Company Overview

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

Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks. As the volume of internet enabled devices grows, every device that employees use to connect to business networks represents a potential risk. Endpoint security software enables businesses to protect devices (endpoints) that employees use for work purposes either on a network or in the cloud from cyber threats.

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last three years, SentinelOne grew its sales at an incredible 58.9% compounded annual growth rate. Its growth surpassed the average software company and shows its offerings resonate with customers, a great starting point for our analysis.

This quarter, SentinelOne reported robust year-on-year revenue growth of 29.5%, and its $225.5 million of revenue topped Wall Street estimates by 1.4%. Company management is currently guiding for a 22.3% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 25.1% over the next 12 months, a deceleration versus the last three years. Despite the slowdown, this projection is commendable and indicates the market is baking in success for its products and services.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

SentinelOne’s ARR punched in at $920.1 million in Q4, and over the last four quarters, its growth was fantastic as it averaged 30.9% year-on-year increases. This performance aligned with its total sales growth and shows that customers are willing to take multi-year bets on the company’s technology. Its growth also makes SentinelOne a more predictable business, a tailwind for its valuation as investors typically prefer businesses with recurring revenue.

This quarter, SentinelOne reported 1,411 enterprise customers paying more than $100,000 annually, an increase of 101 from the previous quarter. That’s quite a bit more contract wins than last quarter and quite a bit above what we’ve observed over the previous year. Shareholders should take this as an indication that SentinelOne’s go-to-market strategy is working well.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

SentinelOne is efficient at acquiring new customers, and its CAC payback period checked in at 36.4 months this quarter. The company’s relatively fast recovery of its customer acquisition costs gives it the option to accelerate growth by increasing its sales and marketing investments.

What makes the software-as-a-service model so attractive is that once the software is developed, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

SentinelOne’s gross margin is good for a software business and points to its solid unit economics, competitive products and services, and lack of meaningful pricing pressure. As you can see below, it averaged an impressive 74.3% gross margin over the last year. That means for every $100 in revenue, roughly $74.30 was left to spend on selling, marketing, and R&D.

In Q4, SentinelOne produced a 74.7% gross profit margin, marking a 2.4 percentage point increase from 72.3% in the same quarter last year. SentinelOne’s full-year margin has also been trending up over the past 12 months, increasing by 3 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

SentinelOne’s expensive cost structure has contributed to an average operating margin of negative 40.1% over the last year. This happened because the company spent loads of money to capture market share. As seen in its fast revenue growth, the aggressive strategy has paid off so far, and Wall Street’s estimates suggest the party will continue. We tend to agree and believe the business has a good chance of reaching profitability upon scale.

Over the last year, SentinelOne’s expanding sales gave it operating leverage as its margin rose by 20.8 percentage points. Still, it will take much more for the company to reach long-term profitability.

SentinelOne’s operating margin was negative 35.6% this quarter.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

SentinelOne broke even from a free cash flow perspective over the last year, giving the company limited opportunities to return capital to shareholders.

SentinelOne burned through $8.92 million of cash in Q4, equivalent to a negative 4% margin. The company’s cash burn was similar to its $10.64 million of lost cash in the same quarter last year.

Over the next year, analysts predict SentinelOne’s cash conversion will improve. Their consensus estimates imply its breakeven free cash flow margin for the last 12 months will increase to 9.2%, giving it more optionality.

Companies with more cash than debt have lower bankruptcy risk.

SentinelOne is a well-capitalized company with $721.9 million of cash and no debt. This position is 11.6% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was good to see SentinelOne narrowly top analysts’ revenue expectations this quarter. On the other hand, its full-year revenue guidance missed significantly, sending the stock down 15% to $16.40 immediately after the report.

Updated: May 22, 2025 at 10:10 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in SentinelOne.

There’s plenty to admire about SentinelOne. To kick things off, its revenue growth was exceptional over the last three years. And while its operating margins reveal poor profitability compared to other software companies, its expanding operating margin shows it’s becoming more efficient at building and selling its software. On top of that, its ARR has surged, showing its fundamentals are improving because it’s becoming a more predictable business.

SentinelOne’s price-to-sales ratio based on the next 12 months is 6.3x. Looking at the software landscape right now, SentinelOne trades at a pretty interesting price. For those confident in the business and its management team, this is a good time to invest.

Wall Street analysts have a consensus one-year price target of $24.47 on the company (compared to the current share price of $19.81), implying they see 23.5% upside in buying SentinelOne in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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