This Growth Stock Has Market-Beating Potential
Investors are starting to look for promising stocks that can beat major indexes over the next bull market. If the Fed cuts interest rates ahead of Wall Street's expectations, risk tolerance will likely rise, which should be great news for growth stocks. Long-term investors willing to accept some volatility along the way should consider this growth stock with serious potential to outperform its peers.
A cybersecurity leader
SentinelOne (NYSE: S) is one of the leaders in endpoint security, meaning it helps organizations protect user devices from malicious software and hackers. Endpoint security is extremely important for businesses and governments that must interact daily with employees, customers, and third parties, potentially exposing their networks to external threats. Many high-profile cybersecurity attacks that have hit the headlines in recent years were triggered by exploiting endpoint weaknesses.
Image source: Getty Images.
SentinelOne's platform, powered by artificial intelligence (AI), gets high ratings from customers and third-party analysts. There's consensus that it's among the best in class. It's fair to expect the market leaders to benefit from the long-term, industrywide trends, so investors should feel confident that demand will be strong for SentinelOne's platform for the foreseeable future.
Impressive financial results
The company's financial results definitely support that thesis. SentinelOne's revenue growth rate is exceptionally high despite slowing down in recent years. The company reported 42% growth last quarter.
Some of this slowing is due to difficult economic conditions. It can also be attributed to the natural tendency of businesses to decelerate as they mature and achieve a larger scale. That's no reason to doubt the stock's potential -- even if SentinelOne's expansion rate continues to slow, it's still growing much faster than most other companies in the stock market.
S Revenue (Quarterly YoY Growth) data by YCharts YOY = year over year.
SentinelOne has slashed its burn rate with recent growth. The company has kept operating expenses in line while delivering gross margin expansion. The company now has cash flow break-even in its sights as early as next year. The stock's investment risk would be significantly reduced if the company no longer has to burn cash -- no doubt, benefiting its share price.
S Gross Profit Margin (Quarterly) data by YCharts.
One of SentinelOne's most important operational metrics was dollar-based net retention, which was 115% last quarter. That means the customers who were active one year ago are now providing 15% more revenue. That also indicates two bullish trends.
First, SentinelOne is retaining a high percentage of customers. Very few subscribers are dropping the services or switching to a competitor. This is an important indicator of customer satisfaction, product quality, competitive standing, and high switching costs. Those ingredients can be crucial for forming an economic moat.
Net revenue retention of that magnitude also shows that SentinelOne is effectively expanding its contracts with a significant number of existing customers. That's only possible through product enhancements, indicating that the company has built an effective process to upsell existing customers and that these customers are receptive to product enhancements.
Taken as a whole, SentinelOne is checking a lot of important boxes. The evidence should give investors confidence that this company can keep churning out good operational results for years to come.
Valuation and risk
SentinelOne's stock is somewhat expensive, with a price-to-sales ratio above 13. That valuation should come as no surprise given the company's growth potential and strong operating metrics.
A lot of strong future performance is already assumed in this valuation. The stock is likely to experience volatility if there are worse-than-expected results, uncertainty, underwhelming forecasts, or general market turmoil. A lot must go right for SentinelOne just to keep the stock on course.
That comes with the territory for growth investors, and this is no exception. That price-to-sales ratio wouldn't be outrageous in retrospect if the company maintains a high growth rate and approaches break-even over the next couple of years. SentinelOne is worth a look for any investors comfortable with the risk profile.
Should you invest $1,000 in SentinelOne right now?
Before you buy stock in SentinelOne, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now... and SentinelOne wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of December 11, 2023
Ryan Downie has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
