Better Buy: SentinelOne vs. CrowdStrike

SentinelOne (NYSE:S) recently eclipsed CrowdStrike (NASDAQ:CRWD) as the highest-valued cybersecurity IPO in history. SentinelOne’s IPO price of $35 per share pegged the company’s value at $8.9 billion, which surpassed CrowdStrike’s record-setting initial valuation of $6.7 billion in 2019.

SentinelOne is now valued at about $12 billion, while CrowdStrike — which caught fire after its debut — is now worth $56.5 billion. Could SentinelOne replicate CrowdStrike’s impressive gains in the near future, or should investors simply stick with CrowdStrike instead?

The differences between SentinelOne and CrowdStrike

Many traditional cybersecurity companies install on-site appliances that secure a company’s network. CrowdStrike entirely replaces that hardware-driven model, which can be difficult to maintain and scale as a company expands, with a cloud-native security platform.

A cloud icon on a computer chip.

Image source: Getty Images.

SentinelOne offers a mix of on-site virtual appliances and cloud-based services. Its detection capabilities run locally within a company’s network instead of relying on external cloud-based connections.

CrowdStrike impressed investors with its cloud-first approach, but SentinelOne claims CrowdStrike’s dependence on cloud services introduces a “large time gap between infection, cloud detection, and response time.”

SentinelOne claims CrowdStrike and other cybersecurity companies still use the “1-10-60” rule for responding to attacks — one minute to detect an attack, 10 minutes to investigate, and 60 minutes to respond. It believes this human-driven system can’t effectively counter newer cyberattacks.

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Instead of relying on human analysts, as CrowdStrike does with its EDR (endpoint detection and response) platform, SentinelOne uses a completely AI-driven Singularity XDR (extended detection and response) platform. SentinelOne believes blending its appliances, cloud services, and AI engine together enables it to respond more quickly to threats than on-site or cloud-native services.

Which company is growing faster?

SentinelOne’s revenue doubled to $93.1 million in fiscal 2021, which ended in January, and surged 108% year over year to $37.4 million in the first quarter of fiscal 2022. It ended 2020 with a dollar-based net retention rate of 117% in fiscal 2021, which means it generated 17% more revenue year over year from its existing customers. That figure climbed to 124% in the first quarter of 2022.

SentinelOne served 4,700 customers at the end of that quarter, including 37 of the Fortune 500 companies, up from more than 2,700 customers a year ago. Within that total, its number of customers that generated more than $100,000 in ARR (annualized recurring revenue) rose 127% to 277.

CrowdStrike’s revenue rose 82% to $874.4 million in fiscal 2021, which also ended in January, and jumped 70% year over year to $302.8 million in the first quarter of fiscal 2022.

CrowdStrike’s net retention rate has stayed above 100% since 2016, and it’s remained above 120% since its IPO. It ended the first quarter with 11,420 subscription customers — up 82% from a year ago. It expects its revenue to increase 54% to 56% for the full year.

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Which company is more profitable?

SentinelOne’s adjusted gross margin declined from 61% in 2020 to 58% in 2021, then tumbled another five percentage points year over year to 53% in the first quarter of 2022. That pressure suggests it doesn’t have much pricing power in the competitive cybersecurity market yet.

That’s why SentinelOne’s net loss widened from $76.6 million in 2020 to $117.6 million in 2021 — then widened again year over year, from $26.6 million to $62.6 million, in the first quarter of 2022.

CrowdStrike’s adjusted subscription gross margin expanded from 75% in 2020 to 79% in 2021, then rose one percentage point year over year to 79% in the first quarter of 2022. That expansion suggests its “land and expand” model — which signs customers onto a single cloud module to cross-sell additional modules — is boosting its pricing power and the stickiness of its ecosystem.

CrowdStrike’s net loss narrowed from $141.8 million in 2020 to $92.6 million in 2021, but widened year-over-year from $19.2 million to $85 million in the first quarter — mainly due to its acquisition of the cloud log management company Humio in March.

But on a non-GAAP basis, which excludes those costs and its stock-based compensation expenses, CrowdStrike turned profitable in both 2021 and the first quarter of 2022. It expects its non-GAAP earnings to grow 30% to 52% for the full year.

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The winner: CrowdStrike

Even if SentinelOne doubles its revenue again this year, it would still trade at 65 times that figure. CrowdStrike, which is already one of the priciest tech stocks, trades at 42 times this year’s sales.

SentinelOne might deserve that premium if it had higher net retention rates or its gross margins were expanding, but its net retention rates are only comparable to CrowdStrike’s and its margins are slipping.

SentinelOne is growing faster than CrowdStrike, but it’s still a lot smaller. Therefore, its growth could decelerate significantly long before it generates even half as much annual revenue as CrowdStrike.

SentinelOne claims its AI-powered platform is disruptive, but many other cybersecurity companies — including CrowdStrike — are aggressively expanding their machine learning and AI capabilities. That competition could apply additional pressure to its shrinking margins.

Both these stocks are expensive, but CrowdStrike is on firmer ground than SentinelOne. SentinelOne looks interesting, but there’s just too much growth baked into the stock at these prices.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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