Setting a Price Target for SentinelOne as Perspective on Trade Shifts
Here's why, after earnings, I see this name as potentially less speculative.
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SentinelOne S, which reported fiscal second-quarter financial results on Thursday evening, is starting to look potentially a little less speculative among the cybersecurity bets.
I'll dig into the details, the chart and my take further down, but for now know that the company posted an adjusted earnings per share of $0.04 (unadjusted EPS: $-0.22) on revenue of $242.183 million. The top-line number printed in line with expectations while reflecting year-over-year growth of 21.8%. The adjusted bottom line profit beat Wall Sreet by a penny. The adjustment was made primarily for the purpose of the firm's stock-based compensation expense. The stock is reacting well to this release.
My Cybersecurity Trading
As readers know, I am normally invested in three cybersecurity names and sometimes go to a fourth. I consider this an industry likely to benefit from a potentially semi-permanent environment of inelastic demand. The names may change, and the technology may evolve over time. That said, what serious business or even household is going to forego the necessity to employ some kind of security protocol in this digital age with bad actors now making use of AI to enhance their attacks on sensitive data?
My holdings in the space have long been two names that really duke it out for the title of "best in class." My favorite name among the two is CrowdStrike CRWD, which reacted very well on Thursday to an earnings release on Wednesday evening. That is a top five name in my most active portfolio. The other is Palo Alto Networks PANW. That name has performed very well since reporting in mid-August. The third name, SentinelOne, is more speculative. I have been in and out of this name this year and had recently moved it into my top ten holdings.
Management
CEO Tomer Weingarten commented in the press release... “We surpassed $1 billion in ARR (annualized recurring revenue) and delivered record net new ARR, continuing to deliver robust growth and platform adoption across AI, data, cloud, and endpoint. Our second-quarter results highlight the momentum of our AI-powered platform.”
CFO Barry Larsen added, “Our strategic investments and focus on operational excellence position us well to deliver durable growth and sustained profitability. Based on our second-quarter outperformance and business momentum, we’re raising our full-year revenue outlook and reaffirming our commitment to full-year operating profitability and free cash flow.”
Operations
As revenue grew 21.8% to $242.183 million, the cost of that revenue increased 19.2% to $60.474 million. That left a gross profit of $181.709 million (+22.6%) on a gross margin of 75%, up from 74.5%. Unadjusted operating expenses increased 15.3% to $262.327 million, leaving an unadjusted operating loss of $80.618 million, which was down from a loss of $79.381 million a year ago. Once adjusted, operating income lands at $5.376 million, up from the year-ago comp of -$6.359 million. Adjusted operating margin improved from -3% to +2%.
After accounting for interest, other income & expenses and taxes, SentinelOne was left with a unadjusted net loss of $72.019 million, which works out to $-0.22 per fully diluted share, flat from the year-ago period. Once adjusted, net income wound up at $13.18 million, up from $3.492 million. That works out to $0.04 per fully diluted share, up from the year ago comparison of $0.01.
Fundamentals
For the period reported, SentinelOne generated operating cash loss $1.043 million. Tack on capital spending of $264,000 (no, I'm not missing zeroes here) and capitalized internal use software of $5.841 million. That leaves "free" cash flow of -$7.148 million, down from -$5.436 million for the same three months a year ago. Including the fiscal first quarter, SentinelOne has actually generated free cash flow of $38.296 million, which is up from $28.32 million.
Moving on to the balance sheet, SentinelOne ended the quarter with a cash position of $818.823 million and current assets of $1.093 billion. Current liabilities add up to $596.776 million. This includes no short-term debt but deferred revenue (not a true financial obligation) of $457.221 million. That leaves the headline current ratio at a nice 1.83. Once adjusted for those deferred revenues, this ratio rises to a herculean 7.83.
Total assets amount to $2.35 billion. Of that number a rough 30% is labeled as either goodwill or other intangibles. Yes, that is a little high. No, it is not alarmingly high. Total liabilities less equity comes to $842.698 million. There is no long-term debt on the books. There are some more deferred revenues not labeled as "current." This is a simply outstanding balance sheet.
Guidance
For the current quarter, SentinelOne is projecting revenue of $256 million, adjusted gross margin of 78.5% and adjusted operating margin of 4%. This revenue number is in line with expectations and would be good for annual growth of 22%.
For the full year, the company sees revenue of $998 million to $1.002 billion with an adjusted gross margin of 78.5% to 79% and an adjusted operating margin of 3%. At the midpoint, this revenue number would also be good for year over year growth of 22%. That midpoint also lands just a smidgen above the $999 million or so that Wall Street had in mind.
My Thoughts
I know that a few analysts had expected a tough quarter that outside of free cash, never really materialized. Six-month cash flows are just fine. The business is growing. The company is profitable on an adjusted basis. The balance sheet is fortress-like. I continue to see this name as my speculative cybersecurity play, but I think it may be inching its way toward not really being so speculative.
Readers will see that SentinelOne has developed a "flat base" or trading range that has lasted from early this past March into the present. The range spans from the lows of early April to the 38.2% Fibonacci retracement level of the November into April sell-off. The stock's 200-day simple moving average is running almost concurrently with that Fibonacci level. Now, that the 50-day SMA has been taken, this is the stock's not target, but next pivot point.
Relative Strength is suddenly much more robust. The daily Moving Average Convergence Divergence suddenly made a more bullish turn as well. The histogram of the 9-day EMA has moved into positive territory. That's short-term bullish. While both the 12-day EMA and 26-day EMA remain in negative territory, the 12-day line has overtaken the 26-day line (bullish) and appears to be surging towards the zero-bound (would be bullish).
SentinelOne Strategy
Target Price: $25
Pivot: 200-day SMA (currently $20.40)
Add: Down to 50-day SMA (currently $17.80)
Panic: New post April low
At the time of publication, Guilfoyle was long CRWD, PANW, S equity.
