Cybersecurity startup SentinelOne, Inc. (S) in Mountain View, Calif., is a pioneer in offering artificial intelligence-powered autonomous threat prevention and detection to help organizations secure their assets. Shares of the cybersecurity company have risen 12.9% since its stock market debut on June 30, 2021, on the back of solid growth in its customer base and its expanded global footprint. However, S’ stock price has been down 34.9% over the past month.

While the security-software company reported better-than-expected growth in revenue in the third quarter of its fiscal 2022, its widening losses are alarming. Furthermore, S’ negative margins and growing operational expenses may prevent it from catching up with its larger peers.

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Growing competition from larger cybersecurity rivals like CrowdStrike Holdings (CRWD) and the company’s lofty valuation could keep investors on edge.

Here’s what could influence S’ performance in the near term:

Competition From Larger Players

The cybersecurity industry is growing rapidly as cybercrimes continue to increase with the world’s changing digital landscape. With spending on security solutions increasing, several prominent players are entering the industry. Consequently, the cybersecurity industry has become intensely competitive.

S continues to face heavy competition from cybersecurity companies like CRWD, McAfee Corporation (MCFE), and Palo Alto Networks, Inc. (PANW), which have larger customer bases and diverse product offerings. This could negatively impact S’ market share and financial performance.

Unfavorable Analyst Estimates

Analysts expect S’ EPS to decline at 18.3% in price over the next five years. The company’s EPS is expected to remain negative in the current quarter and next quarter.

Dismal Financial Performance

S’ non-GAAP operating expenses grew 93% year-over-year in its third fiscal quarter, ended October 31, 2021. Its non-GAAP general and administrative expenses came in at $14 million, up 145% from their year-ago value. In addition, its non-GAAP operating margin stood at negative 69% for the quarter. Furthermore, the company’s non-GAAP net loss amounted to $40 million compared to $26 million a year ago. And S’ free cash flow came in at a negative $21 million compared to $20 million in the prior-year quarter.

Its 0.3% trailing-12-month asset turnover ratio is 54% lower than the 0.6% industry average. In addition, S’ ROTC, ROA, net income margin and EBITDA margin are negative 42.1%, 12%, 140.4% and 133.8%, respectively. Also, its trailing-12-month cash from operations stood at a negative $113.30 million.

Premium Valuation

In terms of forward EV/Sales, S is currently trading at 55.07x, which is 1,246.2% higher than the 4.09x industry average. In addition, its 7.62 trailing-12-month Price/Book ratio is 73.1% higher than the 4.40 industry average. Also, S’ 64.05 forward Price/Sales multiple compares with the industry average of 4.

POWR Ratings Reflect Bleak Prospects

S has an overall D rating, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. S has a D grade for Quality and Value. The stock’s poor profitability and higher-than-industry valuation multiples are in sync with this grade.

Furthermore, the company has a Momentum grade of C, which is consistent with its mixed price performance.

S is ranked #25 of 27 stocks in the D-rated Software – Security industry.

Bottom Line

Surging user growth and expanding global presence have boosted S’ revenues in its  last reported quarter. However, investors could be concerned with the security software provider’s negative profit margin and widening losses in an intensely competitive industry. In addition to that,  its stretched valuation could cause its shares to retreat  in the near term.

How Does SentinelOne, Inc. (S) Stack Up Against its Peers?

While S has an overall D rating, one might want to consider looking at its peer Trend Micro Incorporated (TMICY), having an overall rating of A (Strong Buy).

S shares fell $0.97 (-2.02%) in premarket trading Monday. Year-to-date, S has gained 12.87%, versus a 24.20% rise in the benchmark S&P 500 index during the same period.