A Small Secret Is Threatening This Israeli Cyber Firm’s Plans

Israel cyber firm SentinelOne is trying to hitch a ride on its major rival’s success, but the numbers aren’t in its favor

Omri Zerachovitz
Omri Zerachovitz
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A cyber security command center
A cyber security command centerCredit: AP
Omri Zerachovitz
Omri Zerachovitz

Two years ago, the American company CrowdStrike held its initial public offering, which valued it at almost $7 billion. Since then, its market value has increased sevenfold.

CrowdStrike’s field is security for end-user devices (devices connected to the end of a network, like a cellphone or computer hooked up to the world wide web). In recent years, following the decline of players like McAfee and Symantec, this market has undergone an upheaval. CrowdStrike offers more dynamic and sophisticated solutions that are suited to a new world in which end-user devices are more diverse and cyberattacks are becoming more sophisticated.

Another player in this market is the Israeli firm SentinelOne. “When we started, we had 35 competitors,” said the company’s founder and CEO, Tomer Weingarten, in an interview with the business daily Globes a year and a half ago. “Today, there’s only us and CrowdStrike.”

These two companies represent the new generation of end-user security companies, and they are challenging both the old views and the veteran players, which are trying to reinvent themselves. Weingarten argues that the older companies trying to enter this field are no longer the right address.

“I don’t see any reason why anyone who needs to protect his end points – the devices connected to the internet, or even the cloud – should turn to CheckPoint and Palo Alto,” he said. “These companies are more identified with firewall solutions. They’re wonderful companies, but sometimes I don’t understand why they are still the address.”

SentinelOne founder and CEO Tomer WeingartenCredit: SentinelOne

But he has no hesitation about bestowing lavish praise on CrowdStrike, the leading player in his market. “It’s a fantastic company, with astounding marketing and performance capabilities.”

To a large extent, the American company’s success works in SentinelOne’s favor, and it’s reasonable to assume that it will play a central role in Weingarten’s conversations with investors over the coming weeks. Over the weekend, the company filed a prospectus for an initial public offering on Wall Street, and it’s hoping to benefit from investors’ optimism at/faith in CrowdStrike.

Strike point

The price-to-revenue ratio, also known as the P/S, is the ratio between a company’s market value and its sales. This ratio reflects expectations about the company’s rate of growth, the market it operates in, the efficiency of its operations and other factors. 

If SentinelOne will have a P/S ratio similar to that of CrowdStrike, its market value would be between $6 billion and $7 billion. According to a Bloomberg report from early March, the company is hoping for an even higher market value, of $10 billion.

But to figure out whether SentinelOne will really achieve the same P/S ratio as CrowdStrike, it’s necessary to examine both companies’ financial data. SentinelOne is forecasting revenue growth of $161 million, an increase of 23 percent from the last quarter and 115 percent from the same quarter last year.

CrowdStrike is in an entirely different league, with expected revenue growth of $1.3 billion. But even when it was back at Sentinel One’s level, it was growing faster, with revenue growth of 140 percent compared to the previous year. 

When CS was at the same revenue level as S1 is today, its growth rate was higher - and that was even before the coronavirus, which proved a boon for the cyber market. But even today, CS is growing at a rate of 74 percent, a very high rate for a company its size. 

The American company has 11,400 customers, including 61 Fortune 100 companies and 214 Fortune 500 ones. SentinelOne has 4,700 customers, which means its per-customer income is lower. While its customers do include three of the world’s 10 biggest companies, it only has 37 Fortune 500 companies on the list.

Both companies have one figure that’s identical – their dollar-based net retention rate, which reflects growth in revenues from existing companies. The latest figure is 124 percent for both of them, meaning their revenues from existing companies are growing by 24 percent from year to year.

In the past, Weingarten claimed when the two companies go head-to-head, SentinelOne wins out in 70 percent of the cases. There’s no way to know whether this figure is correct, but one thing is certain – SentinelOne will fight an uphill battle luring the customers who have already chosen CrowdStrike.

Place to grow

Israel cyber firm SentinelOne is trying to hitch a ride on its major rival’s success CrowdStrike Credit: באדיבות סנטינל וו

With regard to revenues, SentinelOne’s numbers are only slightly lower than CrowdStrike’s were back when it was the same size. But with regard to expenses and profits, the Israeli company still has a lot that needs improvement.

SentinelOne invests a lot more in research and development than CrowdStrike did in 2018, when it was the same size (74 percent of revenues rather than 48 percent). It also spends more on sales and marketing (97 percent compared to 87 percent).

The most surprising figure is SentinelOne’s gross profit margin, which stood at 56 percent last four quarters. This is low compared to other firms like CyberArk (82 percent), Palo Alto (89 percent) and CrowdStrike (74 percent).

Weingarten said in the past that CrowdStrike relies more on providing services, whereas SentinelOne relies more on machine learning and automation. But judging by the numbers, that’s not really the case. Generally, service companies are less profitable, because their revenue costs, meaning the amount it costs the company to produce the product or service it supplies, are higher. 

Despite the claim, CrowdStrike is more profitable and on the other hand SentinelOne’s revenue costs consist mainly of maintaining its cloud. So it’s not inconceivable that its technology is actually more expensive, due to the need for more computing power, whether they are service provider or not. 

Ultimately, when you examine the numbers behind SentinelOne’s operating structure, you can see that the company is less efficient and will continue to be so in the future, to the detriment of shareholders.

Additional proof of this can be seen in the amount of time it takes the company to recoup its sales and marketing expenditures. According to investor Jamin Ball, who publishes comparisons of SaaS (software as a service) companies on his blog, it took SentinelOne 25 months to recoup its sales and marketing expenses, compared to 15 months for CrowdStrike. 

Yet another datum he compared was sales and marketing expenses as a percentage of revenue among 75 publicly traded cloud computing companies. SentinelOne’s figure (85 percent last year) was the highest of them all. 

Therefore, it’s no surprise that the company continues to burn through cash. In the first quarter alone, it burned through $33 million.

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