SentinelOne (S -5.04%) posted its fiscal 2023 first-quarter (ended April 30) earnings report on June 1. The cybersecurity company’s revenue surged 109% year over year to $78.3 million, which beat analysts’ estimates by $3.6 million.

Its adjusted net loss widened from $48.5 million to $57.0 million, or $0.21 per share, but still exceeded the consensus forecast by $0.03. On a generally accepted accounting principles (GAAP) basis, its net loss widened from $62.6 million to $89.8 million.

SentinelOne’s stock initially rallied after that earnings beat, but it remains nearly 30% below its IPO price of $35. Should investors take a chance on this growing — but deeply unprofitable — cybersecurity company right now?

Image source: Getty Images.

It’s still growing like a weed

SentinelOne’s extended detection and response (XDR) platform operates on a hybrid mix of on-site virtual appliances and cloud-based services. Instead of relying on teams of human analysts, SentinelOne automates the entire threat detection process with artificial intelligence (AI) algorithms. 

During the first quarter, SentinelOne’s number of customers increased 55% year over year to 7,450. Within that total, its number of customers who generated more than $100,000 in annual recurring revenue (ARR) rose 113% to 591. It also maintained a dollar-based net revenue retention rate of 131%.

Its growth in revenue and customers slightly decelerated over the past year, but it’s still growing much faster than many other cybersecurity companies:

Data source: SentinelOne. YOY = Year over year.

SentinelOne expects its revenue to rise 107%-110% year over year in the second quarter, and to grow 97%-99% for fiscal 2023, which ends next January. By comparison, CrowdStrike (CRWD -6.85%) expects its revenue to rise 51%-52% in fiscal 2023, which also ends next January. Zscaler (ZS -2.43%) anticipates 60% revenue growth in fiscal 2022, which ends this July.

During the conference call, CEO Tomer Weingarten said SentinelOne’s growth reflected its “broad-based strength” across all “geographies, products, and customers,” and that the market’s demand for its services was unaffected by macroeconomic headwinds.

But will SentinelOne ever narrow its losses?

SentinelOne’s growth rates are stunning, but its losses are staggering. On a GAAP basis, its net loss widened from $117.6 million in fiscal 2021 to $271.1 million in fiscal 2022, and analysts expect it to post an even wider net loss of $370 million this year from just $404 million in revenue.

A large portion of SentinelOne’s losses can be attributed to its sky-high stock-based compensation (SBC) expenses, which consumed 43% of its revenue in fiscal 2022 and 40% in the first quarter of fiscal 2023. Those massive stock bonuses also caused SentinelOne’s total number of weighted-average shares to surge 55% sequentially in the first quarter.

Even after excluding those SBC expenses, SentinelOne still can’t turn a profit on a non-GAAP basis. Its non-GAAP operating margin came in at negative 73% during the first quarter — and it expects that figure to come in at negative 73%-75% in the second quarter and negative 60%-65% for the full year. Simply put, SentinelOne still hasn’t proved that its business model is sustainable yet.

On the bright side, its gross margin is still expanding by both GAAP and non-GAAP measures. Its GAAP gross margin rose year over year from 51% to 65% in the first quarter, while its non-GAAP gross margin increased from 53% to 68%.

During the call, CFO David Bernhardt attributed that expansion to its improving “economies of scale, data processing efficiencies, and module cross-sell” capabilities. He also predicted that those tailwinds would eventually propel its gross margins to 75%-80% over the long term.

SentinelOne was also still sitting on $1.6 billion in cash, cash equivalents, and short-term investments at the end of the quarter, and its low debt-to-equity ratio of 0.2 still gives it some room to raise fresh capital.

The valuations and verdict

SentinelOne is trading at a steep discount to its IPO price, but it still isn’t a screaming bargain at 17 times this year’s sales. CrowdStrike and Zscaler trade at 18 and 21 times this year’s sales, respectively.

CrowdStrike and Zscaler are growing slower than SentinelOne, but they’re both profitable by non-GAAP measures. That key difference arguably makes them safer cybersecurity plays than SentinelOne in this volatile market that values financial stability over breakneck growth rates.

SentinelOne is worth nibbling on at these levels, but I think investors should wait for it to rein in its SBC expenses and narrow its non-GAAP losses before accumulating a larger position. For now, CrowdStrike, Zscaler, and other slower-growing cybersecurity companies might be more compelling buys.