What we love about SentinelOne:
Cyber Security Company → Industry Tailwinds
Very Strong Growth (~100% revenue growth 2020-2021)
Recent IPO → opportunity to ‘get in early’
Not much historical information due to recent IPO
Not currently profitable on paper due to high growth
General stock market downturn
If you are a regular at People’s Capital, you know we are bullish on the cyber security industry. Last month, we recommended Fortinet as an opportunity to benefit from the growing necessity to have businesses with secure digital systems. Now we would like to bring a higher risk, but higher reward security in the cyber market to your attention - SentinelOne (NYSE: S). The reasons we love the cyber security industry have not changed, and will be displayed below our thoughts on SentinelOne as they were in the Fortinet article.
Specific to SentinelOne:
SentinelOne has exhibited sensational growth during the time frame for which we have data. Sales grew approximately one hundred percent between 2020 and 2021, while costs grew at a smaller 70%. While SentinelOne is not currently profitable, the company is taking advantage of low interest rates to borrow money and expedite their growth.
SentinelOne has seen such dramatic growth and demand due to their industry leading cyber technology. While the specifics of cyber security are difficult to understand, at a fundamental level SentinelOne is the best at artificial intelligence based protection, which is the future of the industry. Their 2021 Gartner Magic Quadrant for Endpoint Protection Platforms Leader award is proof of their cutting edge technology.
Why we love Cyber Security:
The cybersecurity industry has heavy tailwinds, which makes companies like SentinelOne and Fortinet attractive investments based solely on the type of service they provide. For years, experts have warned that U.S. infrastructure like oil pipelines, the electrical grid, and other commercial firms are vulnerable to attack through their digital systems. Recent high-profile hacks, such as those against the Colonial Pipeline and JBS (meat processing) underscore the urgent need for better cybersecurity among U.S. firms. The inevitable rush to insulate infrastructure and other commercial firms against attack will add fuel to the already growing cyber industry.
Cybersecurity is also an attractive investment because of the recurring revenue price structures commonly found in the industry. Once a cybersecurity company has implemented its protective measures for a firm, it collects revenues for the maintenance of that security service. Thus, cybersecurity firms have reliable recurring revenues from old customers in addition to the revenues from new clients in a fast-growing industry.
Risks Associated with SentinelOne:
SentinelOne recently had its IPO, which means the amount of historical data public investors have on the company is limited. Thus, it is difficult to extract trends from the available information, which makes an investment in the company inherently risky. SentinelOne is also not a profitable company. While they have seen massive growth, the company is not currently close to being profitable, which should always be a concerning trait in a company for an investor. Finally, SentinelOne has a high valuation for its lack of profitability, and a market downturn would likely significantly impact the share price of the business.
After weighing the benefits and risks of an investment in SentinelOne, at People’s Capital, we believe it is a great opportunity to invest early in what could be a large cap company.
The People’s Capital Team