1 Growth Stock Down 69% to Buy Right Now

Cyber ​​security company SentinelOne (S 1.00%) it went public in the summer of 2021 at one of the steepest valuations on Wall Street. Since then, the stock has gradually recalibrated and three years later is trading nearly 70% below its peak. However, investors should not assume that a drop in share price always means the underlying business is struggling — SentinelOne’s business is doing better than ever.

The stock’s struggles have eased over the past year, and this could be just the beginning of SentinelOne’s real growth journey.

Is SentinelOne the Outcast of Cyber ​​Security?

Cybersecurity is a broad and fragmented market where different companies specialize in different types of security. The bottom line in the corporate landscape is that businesses need cutting-edge security to defend against a breach. The average data breach now costs a company nearly $5 million, and companies that offer the best security solutions could be big winners in the coming years. SentinelOne started in endpoint security, but has expanded its capabilities to include protection for cloud, identity, data and more.

However, Wall Street apparently despises this top security company. On a value-to-revenue basis, SentinelOne is the cheapest compared to its peers by a wide margin.

S EV to Revenue (before) data by YCharts.

This means that SentinelOne’s revenue is worth the least of this group. In other words, for whatever reason (growth rate, profitability, competitive position, etc.), investors aren’t willing to pay as much for SentinelOne as they are for its peers. This thinking is wrong and creates a potential investment opportunity.

Why SentinelOne’s value lags its peers

Investors prefer companies that grow profitably. So will the SentinelOne business have more revenue in the future and be profitable?

The answer to the first question is simple: SentinelOne is growing faster than its peers.

S Revenue (Trimely YoY Growth) given by YCharts

Others are coming close, but investors should consider that SentinelOne is about 25% cheaper than the runner-up in the valuation rankings. Given SentinelOne’s growth, the valuation gap likely means Wall Street doesn’t see its earnings quality as on par with its peers. That’s understandable. All of these companies are GAAP profitable except SentinelOne.

However, here could be the opportunity.

A reasonable bet for market returns

If the stock’s valuation is lower because SentinelOne isn’t GAAP profitable, then it’s reasonable to assume that if it could turn a profit, it would justify a valuation closer to the rest of its peers. In addition, its top line is already growing by more than 30% annually. If improvements in financials lead the market to conclude that the company is worth a dramatically higher valuation, market-beating returns should follow.

The million dollar question is: How likely is SentinelOne to make a GAAP profit? The answer is that it is only a matter of time.

SentinelOne’s gross and operating margins have steadily improved as the business has grown.

S Gross profit margin by YCharts.

Additionally, the company generated positive free cash flow in the first quarter of this year and was almost flat in Q2. Management could probably cut some expenses and deliver a higher profit if they wanted to. However, SentinelOne has $1.1 billion in cash and zero debt, so management is instead choosing to maximize revenue growth and let profitability come in its own time. Margin trends make it clear that profitability is on the way, and SentinelOne has the money to be patient. Investors might also be wise to be patient. Even if the stock’s valuation remains the same, only revenue growth should drive it higher over time. That said, long-term investors who hold the stock until Wall Street’s sentiment toward SentinelOne improves will enjoy the best returns on the investment.

Here’s the bottom line: SentinelOne is a healthy and thriving business. Its stock has been down for years due to a lack of profits, but using that logic to justify avoidance would make you miss a possible comeback story that seems inevitable at this point.