'The Fastest Growth Story in Software Today': Street Predominantly Bullish on Dan Loeb-Backed SentinelOne (S)

July 26, 2021 7:47 AM EDT
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Numerous Wall Street firms have kicked off their research coverage of Dan Loeb-backed SentinelOne (NYSE: S) after the company made its public debut at the end of the last month.

Shares of the company opened were opened at $46 a share on June 30th, which was higher than the IPO price of $35 apiece. On the first day, SentinelOne's share price closed at $42.50.

“The market we address is huge. As you see this massive wave of digital transformation ... customers are transitioning into the cloud and that creates a big opportunity for us to expand all these different footprints in the enterprise,” CEO Tomer Weingarten told CNBC after the market debut.

SentinelOne saw its revenue growth rate hit 100% YoY last year.

“We maintain an incredible win rate across every competitor out there. Obviously, the incumbent vendors in our space are relatively weak, using antiquated technologies that are not up to par with the current threat landscape, so for us it’s about continuing to grab market share,” Weingarten added.

As many as 11 Street analysts started their coverage on S with 9 of them kicking off with a “Buy” or equivalent rating. Jefferies and Piper Sandler analysts decided to stay on the sidelines.

BofA Securities analyst Tal Liani initiated a “Buy” rating on S with a price target of $62.00 per share. The analyst believes SentinelOne brings the right technology at the right time.

“SentinelOne is disrupting the $9.7bn endpoint security market, helping evolve the industry from legacy, signature-based antivirus (AV) to cloud-based, fully autonomous AI-powered Extended Detection and Response (XDR) platforms. In addition, the company addresses adjacent markets such as IT operations management, data analytics, orchestration, and more, which should help grow the TAM from the $9.7bn core endpoint security market to $40bn+ by 2024,” the analyst said in a note.

“We model a ~70% annual growth rate for the next few years, driven by agent expansion, platform upselling, module cross-selling, as well as total addressable market (TAM) expansion opportunities in adjacent markets. Our note also identifies areas where we think management’s guidance is overly conservative, suggesting potential upside to our revenue and ARR forecasts.”

Liani notes that the high valuation remains a key risk as share price currently trades at 42.4x CY22E EV/Sales vs 10- 25x for SaaS software companies.

“However, we believe the company is also expected to grow faster than most peers, and our valuation methodology takes this into account EV/Sales per unit of growth, as well as a bull case growth scenario that identifies and eliminates areas of management over-conservatism in guidance, support our PO. At the core, with more than 50% of enterprise employees currently work from home compared to 6% pre-COVID, we see significant growth opportunities for next-gen EPP providers, driven by continued migration to cloud-based Zero Trust architectures,” the analyst added.

Yun Kim, managing director at Loop Capital Markets, also started with a “Buy” rating and $60.00 per share. He says SentinelOne is arguably the “fastest growth story in software today at 76% revenue CAGR estimate over the next three years.”

His bullish view of S is based on 4 key factors:

  1. Urgent need to replace legacy anti-virus endpoint solution that is no longer effective against today’s more sophisticated cyberattacks;
  2. Recent work-from-home (WFH) trend increasing not only the number of endpoints but also the need to secure and manage them outside of the corporate network;
  3. Continued rapid increase in the number of endpoints that need to be secured including IoT devices and cloud workloads;
  4. Agent-based endpoint platform that is evolving into a strategic beachhead for XDR (extended detection and response), which represent the next-generation unifying platform SOC (security operation center).

“While shares currently trade at 42x and 25x our CY22/CY23 revenue estimates, we are projecting 73%/67% revenue growth rates, respectively, representing the highest growth rates in our coverage universe. When its sales multiples are adjusted for respective growth rates (EV/S-to-growth ratio), shares trade at discount vs. its hypergrowth peers. Hence, in our view, there could be a meaningful upside to the stock if the company can simply execute on its growth strategy and meet our revenue growth estimates, which we are comfortable with,” the analyst says in a note to clients.

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