In 2024, it seems to be a year of the haves and the have-nots in the cybersecurity industry. Bigger firms have tended to get bigger, while smaller ones have tended to lose value. Among eight large-cap cybersecurity stocks, including Palo Alto Networks (NASDAQ: PANW), the average 2024 return is 27% as of the Dec. 10 close. Meanwhile, within a group of four small and mid-cap stocks that includes SentinelOne (NYSE: S), shares are down an average of 17%.
So, can the smaller SentinelOne turn things around in 2025 after falling 13% in 2024? I’ll break down where exactly SentinelOne fits within the cybersecurity industry. I’ll give an overview of the company’s financial trends and its battle with a key competitor, as well as provide my overall view of SentinelOne.
Endpoint Security Is SentinelOne’s Middle Name
SentinelOne works largely in three key parts of the cybersecurity ecosystem. They are endpoint, cloud, and identity. Endpoint security protects individual devices, like cell phones and laptops, with stored data. Cloud means protecting environments where organizations store data. Users access the data remotely via endpoint devices. Identity protection means preventing unauthorized users from getting credentials. They could use these to sign into an app with sensitive data. All these areas serve as different entry points that bad actors can use to perform a cybersecurity attack. Thus, it is important to ensure that they are all protected.
The company drives the business through its Singularity Platform, which combines protection from all three vectors and uses AI to detect and respond to cyber threats. However, SentinelOne does specialize in endpoint security through its Singularity Endpoint product. SentinelOne's focus has led to partnerships with other cybersecurity firms. Users can mix and match these to meet their needs. SentinelOne's focus on endpoint security makes CrowdStrike (NASDAQ: CRWD) and Microsoft (NASDAQ: MSFT) its top rivals.
SentinelOne has been growing quickly, with over 30% growth in recent quarters, excluding the last one. It has also made continual progress in its profitability, increasing margins over time. Last quarter, its adjusted operating margin increased six basis points from the previous year to -5%.
Additionally, it achieved positive free cash flow on a trailing twelve-month basis for the first time in the company’s history. Still, it's not ideal to see that the company’s year-over-year revenue growth rates are essentially in line with CrowdStrike’s over the past two quarters. CrowdStrike’s total revenue is nearly five times higher than SentinelOne's.
Can the CrowdStrike Outage Light a Match Under SentinelOne?
One of the main hopes of SentinelOne bulls is that the company can capitalize on the well-publicized CrowdStrike outage. There is evidence that this is happening. CEO Tomer Weingarten said in the latest earnings call that the company has a "record pipeline." In Q3, it had "a record number of wins against [its] closest competitor," likely CrowdStrike.
At the same time, the impact on the company’s financials isn’t immediate. The CrowdStrike outage happened on July 19, so by the end of the company’s third quarter on October 31, it had only about three months to capture any resulting business. While Q3 earnings, released on December 4, showed 28% sales growth, this increase was lower than in previous quarters.
However, cybersecurity systems are sticky and complex, and it's not easy to change providers quickly. Thus, observers should give SentinelOne more time to prove it can really take advantage of the CrowdStrike outage. Still, the endpoint and new business segments saw accelerated growth last quarter.
The company said that customers are very focused on cost savings going into next year. The company’s industry-leading adjusted gross margin of 80% can give it an advantage here. It may have more wiggle room to compromise on price while keeping its margins high.
SentinelOne: Promising Future, But Near Term Is Uncertain
I see SentinelOne as a company on a strong, long-term path. There isn’t much to indicate the firm can’t achieve its goal of profitability soon. It has made consistent progress toward that goal. However, the comment about customer cost savings points to an overall slowdown in the cybersecurity market.
Certain measures indicate SentinelOne may be significantly undervalued compared to CrowdStrike. Its forward price-to-sales ratio is less than half that of CrowdStrike’s. Still, seeing more evidence of SentinelOne taking business from CrowdStrike is warranted. By next quarter, it should be much clearer if the company capitalized on the CrowdStrike outage.
