New Target Price for SentinelOne After Serious Beatdown
The cybersecurity firm should consider pulling back stock-based compensation after releasing ho-hum results.
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OK, loyal readers, please know that I have been and still am long shares of AI-powered cybersecurity software provider SentinelOne S. The stock suffered a serious beatdown overnight in response to the release of the firm's fiscal third quarter financial results. The stock had been trending higher coming into the numbers and my other cybersecurity holding, CrowdStrike CRWD, has rebounded nicely since selling off on the release of those earnings in late November. I had reason for optimism. Let's talk about this.
For the three-month period ended October 31, SentinelOne posted an adjusted EPS of $0.00 (GAAP EPS of $-0.25) on revenue of $210.648 million. The adjusted EPS print missed by a penny, the GAAP EPS number missed by a nickel, and the revenue print beat by almost $1 million, while reflecting year-over-year growth of 28.3%. The adjustment was made primarily for the purpose of stock-based compensation expense.
Annualized recurring revenue (ARR) increased 29% to $859.7 million. Customers with ARR of $100,000 or more increased 24% to 1,310. Gross and operating margin both as reported and adjusted improved from the year-ago period. Cash flow margins, still negative, also showed improvement.
Operations
As mentioned above, revenue generation increased 28.3% to $210.648 million. The cost of this revenue grew 21.7% to $53.26 million. That left a gross profit of $157.388 million (+30.7%) on a gross margin of 75%, up from 73% a year ago. Once adjusted, gross margin rises to 80%, up from 79% for the year-ago period.
Total operating expenses grew 22.1% to $246.508 million, leaving a GAAP operating income/loss of $-89.12 million, down $-81.468 million for the year-ago comparison. GAAP operating margin printed at -42%, up from -50%. On an adjusted basis, operating income/loss improved to $-10.681 million from $-18.186 million, as operating margin improved from -11% to -5%.
After accounting for interest, other income and losses and taxes, the firm's GAAP net income loss hit the tape at $-78.364 million, which works out to $-0.25 per fully diluted share, down from $-0.24 a year ago. Once adjusted, net income/loss printed at $75,000, up from the year-ago comparison of $-7.725 million. This put the firm's adjusted EPS at $0.00, which was up from $-0.03 for the year-ago period.
Guidance
For the current quarter, SentinelOne sees revenue of $222 million, which was largely in line with consensus. The firm also sees an adjusted gross margin of 79% and an adjusted operating margin of -3%.
For the full fiscal year, the firm projects revenue of $818 million, which was slightly above what Wall Street was looking for. SentinelOne also sees a full-year adjusted gross margin of 79% and a full year adjusted operating margin of -4%.
Fundamentals
For the first nine months of the fiscal year, SentinelOne has driven operating cash flow of $37.129 million (up from $-62.192 million for the first nine months a year ago). Out of that number, SentinelOne has spent $1.666 million on capital expenditures and $19.795 million on the capitalization of internal use software. This has produced free cash flow of $15.668 million (up from the nine-month year ago comp of $-72.996 million).
Moving on to the balance sheet, SentinelOne ended the quarter with a cash position of $660.359 million and current assets of $990.991 million. Current liabilities add up to $607.483 million that includes no short-term debt, but $400.515 million in deferred revenue, which as we know is not a true financial obligation. At the headline, the firm's current ratio stands at a healthy 1.63. Once adjusted for those deferred revenues, that current ratio rises to a stunning 4.79. The firm is in good shape.
Total assets amount to $2.367 billion including goodwill and other intangibles of $743.365 million. At 31% of total assets, this is not startling though it is a bit much for my taste. Total liabilities less equity comes to $727.497 million. This still includes no debt of any kind, but another $97.526 million in non-current deferred revenue. All in all, this is an outstanding and well-managed balance sheet.
My Thoughts
Am I discouraged? Maybe just a little. The sales growth is there. Cash flows are improving. The balance sheet is elite. These are among the reasons that I added to my long position overnight. What don't I like? The lack of profitability. The ho-hum guidance that is really just in-line with consensus view. I might think about pulling back on the stock-based compensation if I were running things in order to pull the GAAP results closer to the adjusted results that actually showed a very small positive for net income.
I find it interesting that while there has not been much of a reaction across Wall Street this morning that Susquehanna's five-star rated (by TipRanks) analyst Shyam Patil reiterated his "buy" rating on the stock, while increasing his target price from $28 to $30.
Readers will see that the firm had built a rising-wedge pattern since last June coming out of an inverse head and shoulders pattern that I had shown you back then. Rising Wedges are patterns of bearish reversal, so technically, this sell-off is not surprising. It's really part of the script.
Relative strength has dropped to slightly below neutral, while the daily MACD has taken a bearish turn. Within that indicator, the 12-day EMA has dropped below the 26-day EMA, while the histogram of the nine-day EMA has been negative for a week or so. I see the loss of the 50-day SMA as what has driven portfolio managers to reduce long-side exposure. I would expect support to arise at or above the 200-day SMA to prevent the rout from becoming an exodus.
My Plan for SentinelOne (S)
Add: Down to 200-day SMA
Upside Pivot: Recapture of 50-day SMA
New Target Price: $31.50
Panic: On loss of 200-day SMA.
At the time of publication, Guilfoyle was long S, CRWD equity.
