SentinelOne’s (NYSE:S) Margins are Lagging Peers which may be a Risk Going Forward

On Tuesday SentinelOne, Inc. ( NYSE:S ) released third quarter results, which received a mixed reaction from the market on Wednesday. The stock price initially slumped 15%, but later recovered most of those losses to close 5% down for the day. While the company is still managing triple digit revenue growth, its margins are lagging those of its peers. The lower margins need to be considered when considering the current valuation.

Third quarter highlights:

• Revenue up 128% to $56 mln, $6 mln higher than expected.
• Annual recurring revenue up 131% to $237 mln
• Non-GAAP EPS of -$0.15 was $0.03 better than expected.
• GAAP EPS of -$0.26 was in-line with forecasts.

Is the Valuation Justified?

The growth rate remains impressive and is helping SentinelOne catch up with its larger peers. However, the current valuation is pricing in a lot more growth, even after the stock price has declined 25% since March.

See our latest analysis for SentinelOne

As the following chart illustrates, SentinelOne is still a long way from profitability. In fact, the net loss is expected to widen over the next year and only begin to narrow in 2024 and beyond. This means anyone investing in the company now is paying for earnings that will only materialise some time into the future. Now that the market is paying more attention to inflation, future earnings are being discounted at a higher rate.

There isn't enough visibility of future earnings potential to estimate a value for the stock, and because the company isn’t profitable, a price to earnings ratio is meaningless. In situations like this, the best we can do is compare the company’s price-to-sales ratio to its peers, along with the revenue growth rate and margins.

SentinelOne’s price to sales ratio is a lot higher than it is for similar companies, although this is backed up by the much higher growth rate. However, it has a noticeably lower gross margin, and a very wide loss at the operating level. Ultimately, a stock’s price should reflect earnings potential so these margins matter.

Revenue growth will inevitably slow and when that happens profitability will need to improve. At the same time, the cloud security market is becoming very competitive and the company may need to increase spending to grow market share.

What this means for you:

The market is becoming a lot more sensitive to inflation and the potential for higher interest rates. This means that growth companies need to demonstrate the ability to earn a profit, rather than grow at all costs. 

It’s worth noting that SentinelOne did improve it’s gross margin from the previous quarter. In coming quarters, margins are likely to be an area of focus. Ideally the company needs to continue to grow revenue without increasing spending and improve the gross margin at the same time.

This article only touches on SentinelOne’s margins as they relate to the valuation and growth. If you are interested in understanding the company at a deeper level, take a look at our full analysis of SentinelOne , which includes some of the other factors and risks to consider.

If you are no longer interested in SentinelOne, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

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Simply Wall St analyst Richard Bowman and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.