The market is absurdly underrating this rising AI star.
It's been a tough year for shareholders of cybersecurity stock SentinelOne (S -1.51%). While archrival CrowdStrike (CRWD 0.55%) has exploded to new highs, share prices of SentinelOne have fallen over 30% since January. But keep your chin up; the dark times could soon be over.
SentinelOne remains a stellar investment, and artificial intelligence (AI) tailwinds could soon propel the stock back into the spotlight. My analysis of the stock suggests share prices could double over the next six months.
How?
Here's the investment thesis that makes SentinelOne a potential must-see stock idea today.
SentinelOne trades at pennies on the dollar compared to rival CrowdStrike
Share prices alone can't tell investors the complete story about a stock. Instead, you need to compare a stock to something. For SentinelOne, direct competitor CrowdStrike is the perfect comparison. When comparing using the enterprise value (EV)-to-revenue multiple which compares the total valuation of a firm's operations (enterprise value) to the amount of sales generated in a specified period (revenue), the difference is clear (this metric is used for companies with negative or limited profitability).
Compare how much Wall Street is willing to pay for one versus the other, and the gap is jaw-dropping:
S EV to Revenues (Forward) data by YCharts
The gap has never been wider. At nearly a 4-to-1 premium, Wall Street is saying that SentinelOne is utterly inferior to CrowdStrike. SentinelOne's valuation is the lowest it has ever been! In other words, sentiment has never been worse.
I'm not going to deny CrowdStrike's strong fundamentals. The company is profitable (SentinelOne isn't) 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 recognizes this and loudly points it out via CrowdStrike's far more expensive price tag.
SentinelOne's execution is underrated (for now)
But this is about SentinelOne. What the market is missing here is that SentinelOne isn't some bottom-feeder scraping by. SentinelOne is thriving despite being the underdog to CrowdStrike. For example, revenue grew 40% year over year in the first quarter with tremendous sales momentum coming from SentinelOne's newer products and services.
SentinelOne's data lake platform is growing at a triple-digit percentage rate. That shows that SentinelOne isn't a one-trick pony but a company successfully diversifying into new product categories, which means a larger addressable market. That means more long-term growth opportunities.
Even more impressive are the financial strides the company made while achieving this growth. In Q1, SentinelOne converted 18% of its revenue to free cash flow, up from minus 24% a year ago. That's a 42-percentage-point jump! In other words, SentinelOne is trending toward becoming profitable very quickly. Maintaining strong revenue growth signals that management is doing this without sacrificing growth and gutting expenses to make the numbers look good.
From a product standpoint, SentinelOne delivers top-notch technology. Its platform uses AI to hunt for potential security threats proactively. SentinelOne has also deployed generative AI technology with Purple AI, a ChatGPT-like tool within SentinelOne's platform that helps customers utilize SentinelOne more quickly and easily.
According to peer reviews left by Gartner users, SentinelOne and CrowdStrike deliver virtually equivalent product experiences with an average rating of 4.7 and 4.8 stars out of five, respectively.
Can shares really double in six months?
I predicted shares could rise 98% this year, so let's examine how this can happen.
It's pretty simple.
Nothing is guaranteed, of course, but I predict SentinelOne will continue to perform at a high level. Assuming SentinelOne's financials continue improving, the market will realize that SentinelOne will soon become profitable. That massive valuation gap between SentinelOne and CrowdStrike should eventually begin to narrow again.
The great thing is that SentinelOne can remain far less expensive than CrowdStrike and still produce stellar returns because the company is both cheap and growing quickly. Analysts predict SentinelOne will finish the year with $813 million in revenue. SentinelOne has topped analysts' estimates for every quarter but one since going public, so I expect that figure to be even higher.
Using that revenue estimate, SentinelOne's valuation could reasonably rise to 12 times its enterprise value-to-sales. The stock traded at this level in January, plus it would still be half of what CrowdStrike is changing hands at. At 12 times its estimated 2024 revenue of $813 million, the stock's resulting enterprise value would be $9.7 billion, or 98% above SentinelOne's current $4.9 billion.
Stocks need investor interest to go higher, but such strong fundamentals at a reasonable price look like a home run just waiting to happen.
Justin Pope has positions in SentinelOne. The Motley Fool has positions in and recommends CrowdStrike. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
