Is this fast-growing cybersecurity stock a buy?

SentinelOne (NYSE: S) went public last summer during a euphoric bull market. Since then, sentiment on Wall Street has shifted to the opposite end of the spectrum, and the cybersecurity company’s stock price has fallen almost 70% from its peak.

Bear markets are no fun, but they can present opportunities – and SentinelOne could be a solid one.

Worthy of the hype

Sentinel One’s autonomous platform based on artificial intelligence detects viruses, breach attempts, malicious files and other security issues, and eliminates threats.

Cybersecurity is becoming increasingly critical for businesses. Hackers continue to breach company systems, compromising customer information and stealing other sensitive data. A recent IBM A study indicated that an average data breach costs the victim company $4.35 million. Prevention is better than cure, so cybersecurity should remain a major expense for businesses. Grand View Research expects the cybersecurity industry to grow at an average of 12% per year through 2030.

SentinelOne’s platform has attracted many new customers: the company has seen at least 100% year-over-year revenue growth every quarter since its inception. Initial Public Offeringmaking it one of the fastest growing companies on Wall Street.

Revenue S (quarter-over-year growth) given by Y-Charts

Shortly after its IPO, its price/sales ratio surpassed 100, a stunning valuation that made it arguably the hottest stock on the market.

Why did the air come out of the balloon?

Of course, that was then. Today, the stock is near its lowest price since its IPO and its price-to-sales ratio is below 24. Much of this decline can be attributed to the bear market. Investors aren’t as bold when the economic outlook dims, and high-value stocks tend to be sold in favor of value stocks – mature companies with more stable but slower-growing businesses.

To make matters worse, SentinelOne is still young and far from profitable. You can see below that his free movement of capital and net income are negative, meaning the business is burning money.

S Free cash flow statement

Free cash flow given by Y-Charts

Not all growing businesses will survive these difficult economic times. Falling stock prices make it difficult to raise funds by issuing new shares, and debt is becoming increasingly difficult to access. However, SentinelOne is blessed with a strong balance sheet. Yes, it’s burning cash, but as of April 30, it held cash, cash equivalents and short-term investments worth $1.6 billion and had no debt. So, despite spending $128 million in the past year, its cash cushion would allow it to continue losing money at this rate for another decade without issue.

Is the stock a buy?

You could say that the stock’s fall took stocks from sky-high to bargain-basement. But “negotiate” is a strong word, so let’s consider the details. Compare price-to-sales ratios and revenue growth rates of SentinelOne and Crowdits closest competitor:

S PS Report Chart

SPS report given by Y-Charts

SentinelOne’s valuation fell below that of Crowdstrike, despite its superior growth. Admittedly, Crowdstrike generates positive free cash flow, unlike SentinelOne. However, if you’re a long-term investor, that’s okay because SentinelOne has plenty of cash to fund its growth.

Similarly, compare the two on one enterprise valuebased on the sales/sales (EV/S) ratio. This metric takes a company’s cash out of the equation and values ​​it strictly on the company itself.

Chart S EV to Income (forward)

S EV to income (forward) given by Y-Charts

SentinelOne’s EV/S ratio is about 31% lower than Crowdstrike’s. While business comparisons are never strictly apples to apples, these are two fairly similar businesses. It seems clear that Wall Street is heavily discounting SentinelOne because it is not profitable.

Investors should hope that SentinelOne will eventually become profitable, but no investment is without risk. However, if you’re optimistic about long-term cybersecurity, SentinelOne’s rapid growth could make it a worthwhile investment over time.

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justin pope has positions in SentinelOne, Inc. The Motley Fool does not have positions in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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