The company's stock price is down. Here are factors to consider in buying the dip.
The threat of cyberattacks means cybersecurity is a necessity in today's digital age. For example, the U.S. government is looking to spend $13 billion on cybersecurity for its civilian agencies and another $14.5 billion for the military in its next fiscal year alone.
With digital protection required for every organization engaging online, this reality should benefit cybersecurity firm SentinelOne (S 2.35%). Yet, its stock price dropped after the company announced earnings for its fiscal first quarter, which ended April 30.
Shares are now down nearly 50% from their 52-week high of $30.76. Could this be an opportunity to buy shares in the cybersecurity company? Let's look closer to arrive at an answer.
How SentinelOne's business is faring
Let's first examine SentinelOne's Q1 results to determine what caused the stock price drop. The company's fiscal 2025 is off to a solid start in terms of revenue. First-quarter sales totaled $186.4 million, up 40% from the prior year's $133.4 million.
SentinelOne's Q1 sales growth continued the revenue trend seen over the past several quarters. In fiscal 2024, ended Jan. 31, the firm's full-year sales increased nearly 50% year over year to $621.2 million.
Revenue wasn't the only positive. SentinelOne expanded its gross margin to 73% in Q1 compared to 68% in the previous year. The company generated Q1 free cash flow (FCF)of $33.8 million, a dramatic reversal from the prior year's negative FCF of $31.4 million.
It end-of-quarter balance sheet was phenomenal. Total assets were $2.3 billion, while total liabilities were a mere $694.1 million. And of those liabilities, $493.1 million was deferred revenue, which will eventually be recognized as income.
Given its excellent Q1 performance, what caused SentinelOne's stock price to drop? It boils down to the company lowering its fiscal 2025 full-year sales forecast.
Originally, SentinelOne estimated fiscal 2025 revenue in the range of $812 to $818 million. However, this was lowered to between $808 and $815 million as elevated interest rates and inflation caused a slowdown in cybersecurity spending among customers.
SentinelOne's factors for long-term growth
Despite the haircut to its sales forecast, SentinelOne won't have to deal with the current macroeconomic conditions forever. In fact, Federal Reserve Chairman Jerome Powell indicated interest rate cuts could happen this year, and the European Central Bank recently cut its key interest rate.
In addition, cybersecurity will remain a necessity. As a result, industry forecasts predict the cybersecurity market will grow from $166 billion in 2023 to $274 billion by 2028.
SentinelOne is well-positioned to capitalize on this industry expansion thanks to its compelling cybersecurity technology. Its Singularity platform was built from the ground up to use artificial intelligence (AI), which enables it to identify and deal with cyberattacks in real time. This is an attractive attribute for customers because the faster an attack is caught, the less damage it can do to IT systems.
CEO Tomer Weingarten succinctly described the benefits of SentinelOne's platform, stating, "The best security is invisible, working autonomously to defend you at all times. We're already a leader in AI-based security and the only platform with multiple layers of AI, which gives enterprises higher efficiency, better protection, and more automation."
To buy or not to buy SentinelOne stock
SentinelOne's rapid revenue growth is a testament to the strength of its technology. Sales are increasing not just from acquiring new customers but also from renewals and expanded spending by existing clients.
The company is pursuing international markets to grow its business. It's seeing success in this area as Q1 sales outside the U.S. totaled $68.1 million, up from $47.3 million last year.
The company is expecting its strong sales performance to continue. Looking ahead to Q2, SentinelOne is predicting revenue of $197 million, a double-digit increase over the prior year's $149.4 million.
Consistent year-over-year revenue growth, improving margins, positive FCF, AI-based tech, and an expanding industry all work to position SentinelOne for continued success. It's no wonder the current consensus among Wall Street analysts is an overweight rating with a median share price target of $23 for SentinelOne stock.
Taking these factors into account, SentinelOne shares look like a worthwhile investment to buy on the dip and hold over the long term.
Robert Izquierdo has positions in SentinelOne. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
