It’s been a rough year for shareholders of cybersecurity stocks SentinelOne (NYSE: S ). While archival CrowdStrike (NASDAQ: CRWD ) has broken out to new highs, SentinelOne stock prices have fallen over 30% since January. But keep your chin up; the dark times may be over soon.
SentinelOne remains a stellar investment, and artificial intelligence (AI) tailwinds may soon push the stock back into the spotlight. My stock analysis suggests that stock prices could double over the next six months.
How?
Here’s the investment thesis that makes SentinelOne a potential stock idea to watch today.
SentinelOne trades for pennies on the dollar compared to rival CrowdStrike
Stock prices alone cannot tell investors the full story about a stock. Instead, you need to compare an action to something. For SentinelOne, direct competitor CrowdStrike is the perfect comparison. When comparing the use of the multiple of enterprise value (EV) to earnings, which compares the total valuation of a firm’s operations (enterprise value) to the amount of sales generated in a given period (revenue), the difference is clearly (this metric is used for companies with negative or limited profitability).
Compare what Wall Street is willing to pay for one versus the other, and the gap is stark:
S EV for Revenue (Forward) provided by YCharts
The gap has never been wider. At a price of nearly 4 to 1, Wall Street is saying that SentinelOne is completely inferior to CrowdStrike. SentinelOne’s rating is the lowest it’s ever been! In other words, the feeling has never been worse.
I won’t deny CrowdStrike’s strong fundamentals. The company is profitable (SentinelOne is not) and larger in size and revenue than SentinelOne, which makes it the leader. SentinelOne faces challenges competing as a smaller company with pockets that aren’t as deep. The stock market knows this and is pointing it out loud through CrowdStrike’s much higher price.
SentinelOne execution is underrated (for now)
But that’s about SentinelOne. What the market is missing here is that SentinelOne is not a downstream supplier. SentinelOne is thriving DESPITE being CrowdStrike’s loss. For example, revenue grew 40% year-over-year in the first quarter with tremendous sales momentum coming from SentinelOne’s newest products and services.
SentinelOne’s data lake platform is growing at a triple-digit rate. This shows that SentinelOne is not a one-trick pony, but a company that is successfully diversifying into new product categories, meaning a larger addressable market. This means more long-term growth opportunities.
Even more impressive are the financial strides the company made while achieving this growth. In the first quarter, SentinelOne converted 18% of its revenue into free cash flow, down from minus 24% a year ago. She’s one 42–percentage points dance! In other words, SentinelOne is trying to become profitable very quickly. Maintaining strong revenue growth signals that management is doing so without sacrificing growth and spending to make the numbers look good.
From a product standpoint, SentinelOne offers top-notch technology. Its platform uses AI to proactively scan for potential security threats. SentinelOne has also deployed generative AI technology with Purple AI, a ChatGPT-like tool within SentinelOne’s platform that helps customers use SentinelOne faster and easier.
According to the evaluations of colleagues left by Gartner users, SentinelOne and CrowdStrike offer virtually equivalent product experiences with an average rating of 4.7 and 4.8 stars out of five, respectively.
Can stocks really double in six months?
I predicted that the stock could rise 98% this year, so let’s examine how that might play out.
It’s very easy.
Nothing is guaranteed, of course, but I predict that SentinelOne will continue to perform at a high level. Assuming SentinelOne’s financials continue to improve, the market will realize that SentinelOne will soon become profitable. The massive rating gap between SentinelOne and CrowdStrike should eventually start to narrow again.
The best thing is that SentinelOne can remain much less expensive than CrowdStrike and still produce excellent returns because the company is both cheap and growing fast. Analysts predict that SentinelOne will end the year with $813 million in revenue. SentinelOne has topped analyst estimates for every quarter but one since going public, so I expect that number to be even higher.
Using that earnings estimate, SentinelOne’s valuation could reasonably rise to 12 times the enterprise value to the sale. Shares traded at this level in January, plus it would still be half of what CrowdStrike is changing. At 12 times its estimated 2024 earnings of $813 million, the resulting enterprise value of the stock would be $9.7 billion, or 98% above SentinelOne’s current $4.9 billion.
The stock needs investor interest to go higher, but such strong fundamentals at a reasonable price seem like a home waiting to happen.
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Justin Pope has positions in SentinelOne. The Motley Fool has positions on and recommends CrowdStrike. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
#Forecast #Artificial #Intelligence #stock #grow
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