Shares of SentinelOne (S 19.05%) surged 19.2% through 11 a.m. ET on Wednesday after a modest earnings beat sparked a frantic rush by Wall Street banks to raise price targets on the rising cybersecurity stock.
Heading into the third quarter of its fiscal 2024, analysts had limited hopes for SentinelOne, predicting the company would lose money ($0.08 per share) on sales of only $156.1 million. The analysts were right about SentinelOne losing money — but wrong on the amount. Instead of $0.08 per share, SentinelOne’s loss was less than half as bad as feared (only $0.03 per share), and its revenue of $164.2 million beat expectations by more than 5%.
SentinelOne sales and earnings
SentinelOne’s earnings beat didn’t just surprise Wall Street — it surprised management itself, with CEO Tomer Weingarten exclaiming that his company’s artificial intelligence (AI)-based cybersecurity products drove better-than-expected “top and bottom line expectations … industry-leading growth and margin improvement.”
Revenue grew an astounding 42% year over year. Gross margin surged 9 full percentage points to 73%. And operating profit margin, while still negative, improved by 40 percentage points, from negative 90% to negative 50%.
Is SentinelOne stock a buy?
Admittedly, profits are still negative at the company, but management sees advance improvements ahead with full-year fiscal 2024 revenue growing to $616 million ($10 million more than Wall Street was expecting), and a non-GAAP (adjusted) operating profit margin of 20%.
Twelve separate Wall Street analysts responded to SentinelOne’s earnings beat, and revenue guidance, by raising their price targets this morning. With a $21-per-share target, Deutsche Bank is now the most conservative, advising that investors merely hold on to their shares. In contrast, JMP Securities is putting out a Street-high prediction of $33 per share, implying that SentinelOne stock could go up another 30% over the next 12 months.
Now, the bad news is that most analysts polled by S&P Global Market Intelligence still don’t foresee SentinelOne turning profitable according to generally accepted accounting principles before 2028. The good news, though, is that a consensus seems to be forming that SentinelOne will create positive free cash flow (FCF) by the back half of next year (SentinelOne’s fiscal 2025), and that this number may grow past $110 million in fiscal 2026.
Is that enough cash to defend buying SentinelOne at an implied valuation of 65 times FCF two years out? I think that valuation sounds a bit too rich — but judging from the applause on Wall Street this morning, it seems I’m in the minority with that view.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
