Mounting Regulatory Costs And Open-Source Competition Will Hurt Cybersecurity Markets

Key Takeaways

• Rising compliance costs, regulatory hurdles, and industry consolidation threaten SentinelOne's revenue growth, margins, and long-term relevance in the cybersecurity market.
  
• Persistent R&D and sales spending, coupled with strong competition and customer budget sensitivity, may undermine profitability and limit operating margin improvement.
  
• Transition to a unified AI-driven security platform and expanding customer base, along with strong product innovation, supports lasting growth, profitability, and competitive position.

Catalysts

Operates as a cybersecurity provider in the United States and internationally.

• The increasing complexity of global data privacy laws and heightened regulatory scrutiny are likely to drive up compliance costs and may restrict SentinelOne's ability to expand into certain markets, potentially capping future revenue growth and putting pressure on net margins.
  
• With enterprise customers becoming more budget-conscious in a volatile macroeconomic environment, elongated sales cycles and delayed purchasing decisions are expected to slow net new annual recurring revenue growth, resulting in weaker top-line momentum than the current valuation implies.
  
• The accelerating adoption of open-source security tools and expanding government-backed cybersecurity initiatives threaten to commoditize core security offerings, undermining SentinelOne's pricing power and constraining both revenue growth and gross margins in the coming years.
  
• Persistent heavy investments in research and development and sales will be required to keep pace with rapidly evolving AI-powered cyber threats, which will inhibit SentinelOne's ability to drive sustained operating margin improvement and consistent profitability, especially as larger, better-capitalized competitors accelerate their own innovation cycles.
  
• As the industry consolidates around integrated platform vendors, SentinelOne's core endpoint-focused solutions risk being marginalized by broader cloud-native security platforms offered by rivals, diminishing relevance in key growth areas and leading to lower contract values and renewed revenue instability as current customers seek more comprehensive alternatives.

SentinelOne Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on SentinelOne compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming SentinelOne's revenue will grow by 19.2% annually over the next 3 years.
• The bearish analysts are not forecasting that SentinelOne will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate SentinelOne's profit margin will increase from -49.4% to the average US Software industry of 13.2% in 3 years.
• If SentinelOne's profit margin were to converge on the industry average, you could expect earnings to reach $193.6 million (and earnings per share of $0.53) by about August 2028, up from $-426.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 40.8x on those 2028 earnings, up from -13.4x today. This future PE is greater than the current PE for the US Software industry at 40.4x.
• Analysts expect the number of shares outstanding to grow by 3.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.39%, as per the Simply Wall St company report.

SentinelOne Future Earnings Per Share Growth

Risks

• SentinelOne's expansion of its AI-powered autonomous security platform, with record adoption of Purple AI and growth in its cloud, data, and endpoint offerings, is driving higher average contract values and recurring revenue, supporting sustained long-term revenue growth.
  
• The successful pivot from product-centric to unified platform sales, combined with broader and deeper customer penetration-including large enterprises and the public sector-enhances customer stickiness and opens significant upsell and cross-sell opportunities, strengthening both revenue visibility and long-term margins.
  
• Continued margin expansion, with gross margins maintained at roughly 79% and operating margins steadily improving toward positive territory, reflects effective cost discipline and operational leverage, increasing the likelihood of expanded profitability and sustained positive earnings.
  
• Industry-wide secular trends-such as growing enterprise digitization, the proliferation of cloud and IoT, and increasing regulatory mandates-are expected to keep cybersecurity a top spending priority, directly benefitting SentinelOne's differentiated and FedRAMP High-authorized AI platform, and supporting long-term demand and revenue resilience.
  
• Ongoing product innovation and industry recognition for growth and technology leadership, including share repurchase authorization and robust cash generation, demonstrate management's confidence and fiscal flexibility to fuel further R&D and go-to-market enhancements, supporting higher long-term earnings and shareholder value.

Valuation

• The assumed bearish price target for SentinelOne is $17.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of SentinelOne's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $36.0, and the most bearish reporting a price target of just $17.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.5 billion, earnings will come to $193.6 million, and it would be trading on a PE ratio of 40.8x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $17.22, the bearish analyst price target of $17.0 is 1.3% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.