SentinelOne (S) – M&A & Contemplating – January 5, 2024

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SentinelOne (S) – M&A & Contemplating – January 5, 2024

SentinelOne announced its intent to acquire PingSafe. This will add a Cloud Native App Protection Platform (CNAPP) offering to join SentinelOne’s budding cloud workload and data protection products. PingSafe’s CNAPP will be used to tie all of these pieces together. This was a needed purchase to round out its cloud security suite to better compete with CrowdStrike and Palo Alto. SentinelOne had been more of a point solution vendor within cloud security specifically. This allows it to market itself as a platform play outside of solely endpoint security (where it’s clearly a platform play already).

SentinelOne is a very interesting story. It’s much smaller than CrowdStrike, cheaper based on gross profit multiples, and far behind in terms of EBIT and FCF leverage. The two companies are roughly the same age. Its growth rates are already slowing a lot more quickly than CrowdStrike’s did, but that’s not really a deal-breaker. CrowdStrike is 1 of 1 in terms of scaled growth and profit. It doesn’t need to be CrowdStrike.

There’s a lot of margin expansion extrapolating to do here to get excited about this investment. If it can deliver on that margin expansion (and there’s a strong trend pointing to that happening) this really can work. That assumed progress would likely be rewarded with gross profit multiple expansion while brisk revenue growth adds to potential returns. Personally, I’m much more comfortable in CrowdStrike (current holding) than SentinelOne.

Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases

Still, I do see a very large potential reward for those willing to take the heightened risk associated with SentinelOne. It admirably and expediently corrected some executional blunders a few quarters ago. That matters a lot to me. It doesn’t have the balance sheet of CrowdStrike or Palo Alto. It doesn’t (quite yet) have the product breadth either. Furthermore, Falcon Go (CrowdStrike’s small business bundle) is enjoying great traction within SentinelOne’s core small business niche.

All of this is to say that there are considerable risks. But the security market is still very fragmented, still roughly 50% controlled by legacy players and still ripe for more disruption. It’s clear that CrowdStrike and Palo Alto will be poised to sharply benefit. SentinelOne could very well be too. I’ve added this name to my watch list. I’d like to see it get closer to EBIT breakeven to grow comfortable enough with potentially starting a new position. I’d love to own more of the cybersecurity market.

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