SentinelOne (S)

Cyber security company SentinelOne (NYSE:S) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 22.9% year on year to $229 million. On the other hand, next quarter’s revenue guidance of $242 million was less impressive, coming in 1.2% below analysts’ estimates. Its non-GAAP profit of $0.02 per share was in line with 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.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Luckily, SentinelOne’s sales grew at an incredible 52.1% compounded annual growth rate over the last three years. Its growth beat the average software company and shows its offerings resonate with customers, a helpful starting point for our analysis.

This quarter, SentinelOne’s year-on-year revenue growth of 22.9% was excellent, and its $229 million of revenue was in line with Wall Street’s estimates. Company management is currently guiding for a 21.6% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 23.1% over the next 12 months, a deceleration versus the last three years. Despite the slowdown, this projection is commendable and implies the market is forecasting 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 $948.1 million in Q1, and over the last four quarters, its growth was fantastic as it averaged 28.1% 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 1,459 enterprise customers paying more than $100,000 annually, an increase of 48 from the previous quarter. That’s a bit fewer contract wins than last quarter and quite a bit below what we’ve observed over the previous year, suggesting its sales momentum with new enterprise customers is slowing. It also implies that SentinelOne will likely need to upsell its existing large customers or move down market to maintain its top-line growth.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

It’s relatively expensive for SentinelOne to acquire new customers as its CAC payback period checked in at 64.2 months this quarter. The company’s drawn-out sales cycles partly stem from its focus on enterprise clients who require some degree of customization, resulting in long onboarding periods. The complex integrations are a double-edged sword - while SentinelOne may not see immediate returns from its sales and marketing investments, it is rewarded with higher switching costs and lifetime value if it can continue meeting its customer’s needs.

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 74.8% gross margin over the last year. Said differently, SentinelOne paid its providers $25.17 for every $100 in revenue.

SentinelOne’s gross profit margin came in at 75.3% this quarter, up 2.2 percentage points year on year. SentinelOne’s full-year margin has also been trending up over the past 12 months, increasing by 2.4 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).

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

SentinelOne’s expensive cost structure has contributed to an average operating margin of negative 38.9% 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 12.1 percentage points. Still, it will take much more for the company to reach long-term profitability.

In Q1, SentinelOne generated a negative 38.2% operating margin.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

SentinelOne has shown weak cash profitability over the last year, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 2.1%, subpar for a software business.

SentinelOne’s free cash flow clocked in at $45.44 million in Q1, equivalent to a 19.8% margin. This result was good as its margin was 1.7 percentage points higher than in the same quarter last year. Its cash profitability was also above its one-year level, and we hope the company can build on this trend.

Over the next year, analysts predict SentinelOne’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 2.1% for the last 12 months will increase to 9.2%, it options for capital deployment (investments, share buybacks, etc.).

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

SentinelOne is a well-capitalized company with $766.9 million of cash and no debt. This position is 11.8% 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.

We struggled to find many resounding positives in these results. ARR, revenue, operating profit, and EPS were all roughly in line with expectations, which we've seen is rarely good enough for higher-multiple software companies. Additionally, the company's revenue guidance for next quarter slightly missed. Overall, this quarter could have been better. The stock traded down 13.8% to $16.95 immediately after reporting.

Updated: July 9, 2025 at 10:13 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own SentinelOne, you should also grasp the company’s longer-term business quality and valuation.

We think SentinelOne is a good business. First 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 5.8x. Looking at the software landscape right now, SentinelOne trades at a pretty interesting price. If you believe in the company and its growth potential, now is an opportune time to buy shares.

Wall Street analysts have a consensus one-year price target of $23.01 on the company (compared to the current share price of $18.56), implying they see 24% upside in buying SentinelOne in the short term.