Hi Saul,
I believe this forum thrives when there are honest and open debates, so I’m going to engage hoping to understand your position better.
Even though I take your point that obsessing over minutiae is not productive, I believe there may be solid reasons for exiting both SentinelOne and Zscaler and I would like to try to articulate those and hear counter-arguments.
SentinelOne
The customer growth story in terms of the number of customers added remains intact as you rightly point out above. However contrary to the story with Snowflake - which is that while the growth in the number of customers added may be declining, the quality of those customers are improving - I believe the opposite may be happening for SentinelOne. This could be indicated by the growth of the # of customers above $100k:
**>$100k Q1 Q2 Q3 Q4**
2021 122 145 173 219
2022 277 345 416 520
2023 591
QoQ
2021 19% 19% 27%
2022 26% 25% 21% 25%
2023 **14%**
So the number of large customers added, while still a lot, has decelerated quite a bit this quarter. And this while it is their strategy to target larger customers. Perhaps they are not as successful as they would like to be and Crowdstrike and PaloAlto are grabbing the big ones?
The second point relates to operating leverage, which I would argue also went the wrong way:
**Op % Q1 Q2 Q3 Q4**
2021 -126% -101% -102% -103%
2022 -127% -98% -69% -66%
2023 **-73%**
**FCF % Q1 Q2 Q3 Q4**
2021 -70.0% -80.5% -85.6%
2022 -87.4% -97.6% -37.0% -10.7%
2023 **-69.9%**
Whereas the decline in operating margin could be put down to seasonality, the FCF break is a lot bigger. I therefore question whether the increasing operating leverage trend is still in tact. And this is probably my main concern and the key thing which I think has changed.
A narrative around these numbers could be that they are having to spend more and more, to attract relatively less valuable customers than the competition.
In addition, as with the comparison of Cloudflare and Fastly, a comparison with Crowdstrike is appropriate. I have previously thought (and written) that the likely trajectory of S is relatively easy to anticipate as they track CRWD’s earlier performance pretty well. Lately that has also started to deteriorate. Over the last 2 quarters SentinelOne has become much less efficient in how they generate roughly the same revenue that CRWD did about 3 years earlier.
Comparing Crowdstrike’s Q219, Q319 and Q419 revenues, operating and FCF margins to SentinelOne’s for the last 3 quarters yield the following:
**CQ219 CQ319 CQ419**
**SQ322 SQ422 SQ123**
**Rev**
CRWD 55.7 66.4 80.5
S 56.0 65.6 78.3
**Op%**
CRWD -50% -43% -35%
S -69% -66% -73%
**FCF%**
CRWD -64% -20% -4%
S -37% -11% -70%
The above spend trajectory seems to invalidate my previous hypothesis that SentinelOne will track Crowdstrike’s trajectory. So again, this to me would indicate that the numbers have changed, thereby calling into question my original thesis.
SentinalOne now seems like they are having to spend like hell just to try to keep up with Crowdstrike’s earlier trajectory, not to mention Crowdstrike’s current trajectory.
Zscaler
A lot has been written about Zscaler, so I would just like to add one thing: this is not a one quarter billings blip. This is the second quarter of decelerating billings growth. Last quarter this was the main orange flag I saw in an otherwise very solid set of numbers - and I did not sell, but this quarter the trend got worse - and I did:
**Bill Q1 Q2 Q3 Q4**
2019 65 115 85 126
2020 88 135 131 195
2021 145 232 225 332
2022 248 368 346
**YoY Q1 Q2 Q3 Q4**
2019 35% 17% 54% 55%
2020 64% 72% 72% 70%
2021 71% **58% 54%**
So while the last 3 quarters of revenue growth has tracked above 60%, billings growth has now been in the 50-s for two consecutive quarters.
And my expectation, based on what they’ve done in the last 3 years (a 48% qoq billings increase) is that billings growth will again hit mid/low fifties yoy next quarter.
Because billings drive revenue, it is inevitable that revenue growth will drop below 60% in the next couple of quarters, imho.
That, for me, is again enough to come to the conclusion that something has changed. They are simply not as successful at billing for new work as they were a couple of quarters ago. Their >70% billings growth 4 quarters in a row, which has fuelled their increasing revenue growth rate over the last several quarters, has now gone in reverse and will inexorably drag down their revenue growth in quarters to come.
I thought that the reasons for both companies were enough to sell, but perhaps I was too trigger-happy and am missing something.
Appreciate your thoughts, as always.
-WSM.