Bear's Mid-March Update

Investment Analysis Clubs Saul’s Investing Discussions
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There are several things I want to address, so I figured the easiest way was just to discuss each company in my portfolio. It’s changed a ton since my Feb update: Bear's Portfolio through 02/2023

Here’s the update as of today (but remember it could change drastically at any time):

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BILL – Why do I keep adding to BILL? Well, first of all, I’m only adding enough to keep the position just over 20%. You will never see me add enough to take it to say, 40%. IMO, there should always be some limit to how much we trust in any company. That said, the answer is: BILL hasn’t failed us yet. Sure, they weren’t able to raise their FY guide this past quarter, but they haven’t missed. They’ve done everything they’ve promised. They’ve endured this SVB thing, and IMO, they’re handling it amazingly. I just think BILL is misunderstood and undervalued etc. But I’m humble enough to know that maybe the market is right and I’m wrong, so it remains my largest position, but still less than 25% of my portfolio.

Zscaler – I said in my February review that the “watchlist” company I was most interested in was Zscaler. I wanted to see their 3/2 earnings (especially Billings) before getting back in. Everything checked out, and to my surprise the stock has been falling anyway. Part of that is that everything is falling…but otherwise I’m bewildered that the market didn’t like this report. I’m comfortable with a 10% position…I’ve even pushed it a little higher in the last few days because I think this one is way undervalued. This is another company that hasn’t missed (at least not in years).

Datadog – I was very disappointed in Datadog’s guidance a month ago, but as most every company has come in with underwhelming earnings calls, I’ve realized they’re in the short list of companies that still haven’t missed, and have done what they said they would. That’s worth a lot to me. I see no reason to hold more than 10%, and at present I’m a bit below that, as Datadog has only recently fallen to a valuation I think is more reasonable, but it’s not a company I’m concerned about long term.

Global-e – This is not a company I expected to add, but @JabbokRiver42 convinced me that they are really seeing tailwinds when not many of our companies are. I just think the TAM is so huge for e-commerce that even their little niche has a long runway, hence the still 60%+ revenue growth they’re seeing. That will slow a bit I’m sure, but I’m in for a small position. I don’t want it to get much above 5% though, because management hasn’t won my confidence. Guidance has been all over the place as I highlighted here: Global-e Online Q4 2022 results - #3 by PaulWBryant

Snowflake – Well you can see I’ve slashed this one immensely. This report was the most disappointing to me of any company I follow. We know we’re in a tough environment, but Snowflake made the completely unforced error of giving 47% FY guidance early, and then having to pull it back to 40% just 90 days later. They are out of the trustworthy group (BILL, ZS, and DDOG) who have not missed – who have done what they said they would. I expected better from SNOW management. And bafflingly, this is still pretty much the most expensive stock around.

Samsara – This is a new one for me. They’re a software company, but they’re in the logistics space, so a slight bit of diversification from our others. They don’t seem to be facing as many headwinds as most of ours. I’ve only started following them in the last few weeks, though.

Cloudflare – Cloudflare hasn’t failed us yet, either has it? I guess it’s in the trustworthy group with BILL, ZS, and DDOG. That’s why I’m believing their FY guide. I love @rmtzp’s point here that Saul highlighted: Cloudflare (NET) reports Q4 - #12 by rmtzp Perhaps I need to increase this one closer to my 10% comfort level. It doesn’t seem cheap even after falling 8% so far this month…but it rarely gets cheap.

Docusign – I was wrong on this one. The Billings guide was awful. I sold.

Please, please, please: let me know if anyone has thoughts on these companies. I’ve said this before, but sometimes I think we “agree to disagree” too much when we should continue to argue and take things point by point, to try to get to the bottom of things. That’s how we learn together, and that can save us from big mistakes. With companies like Snowflake and Gitlab and SentinelOne failing to do what they said they would, I think it’s more important than ever to discuss possible outcomes and not always give management the benefit of the doubt. I’m realizing I need to listen to my gut more on which mgmt teams to trust, and also I truly want/need to have the eyes of all you other smart people out there on the companies I’m following!

Thanks,
Bear

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Is it a good idea to place that much weight on whether a company misses their guidance in one quarter or not?

For example:
In Q1 2023 (May 2022) report, Nvidia gave a next Q2 2023 guide of $8.10 billion in revenue, plus or minus 2%.
Well, less than 3 months later, on Aug 8 (75 days later to be exact) - they preannounced what we would call a disaster of $6.7 billion Q2 revenue guide. That’s a -17.2% miss!!

Strangely enough- the stock price has gone from $177 that day to $234 today premarket.
+32% return!

Meanwhile, BILL’s management has never “missed”, yet their stock is down -50% from Aug 8.

Why? I don’t know, I don’t follow NVDA closely, but this I felt is a sample challenge against the idea that just because management missed on a guide we should toss the company out the window and we can’t really trust them. There is certainly much more complex factors at play. For example SNOW’s FY guide takedown apparently was not much farther from wallstreet’s whisper number: one analyst I read somewhere said the consensus was 42% FY guide takedown, so the actual 40% FY adjustment wasn’t far from true expectations- hence perhaps why SNOW didn’t crater -30% like GTLB (which their management truly failed, in my opinion).

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I believe you’re arguing against a straw man here. I never said we should toss the company out the window. In fact, I still own some SNOW.

All I’m saying is that some companies still belong in the circle of trust. I agree that the market doesn’t like BILL anyway, but what are you arguing for? Should we just toss them out because the market has collectively sold them?

Bear

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Tossing out the window was too strong of word choice. I’ll emphasize this part I said at the top

Is it a good idea to place that much weight on whether a company misses their guidance in one quarter or not?

Suppose BILL ends up missing next Q - viewing that entirely in isolation might not be sufficient to reduce one’s allocation - maybe the market expected them to already miss. What I’m trying to express is that putting companies in a basket of “this management didn’t miss (yet)” vs “this management missed” during troubled economic times, may not be as helpful as doing so during the 2021 peak bull/bubble market

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Sure, it’s just one data point, and I’m not trying to put undue weight on it, but it is worth something to me. It truly does say something about management if they are capable of under-promising and over-delivering in this tough market. And maybe it’s less over-delivering lately, and just having the wisdom not to throw out a number you regret three months later.

Personally, though, I’m not sure we need to take management’s words as gospel whether they have a good track record or not. Do you still believe SNOW will hit $10b revenue in fiscal 2027 or whatever it was they promised? If they struggle with visibility 90 days out, why would we believe they can foresee what will happen several years from now?

We do place a lot of emphasis on numbers here, but I don’t think that should change.

Bear

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Hi Bear,
Thanks for update.
Interesting you got onto Samsara… I also just started a position… I am very surprised by their progress because historically, this (asset tracking / vehicle tracking) market has been very crowded and commoditized… but after hearing a couple of earnings calls, I am getting a sense that Samsara is onto something here… reminds me of cyber security industry before Crowdstrike (and Zscaler)… I used to stay away from that, and than CRWD and ZS changed the industry.

I am a bit concerned on valuation but otherwise getting convinced that this company can become what Saul calls category crusher…

Reason for enthusiasm is not only strong revenue growth but the business model… it is hard business model to get right - from product, deployment, integrating with lots of thir party APIs and then ofcourse selling to large non-digital customers… thats a momentum that is hard for someone else to catch up to.

On the call, management talked about how they see different competitors in different verticals… just tells me that Samsara has built the scalable business in this difficult market that is hard for others to get to.

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Bear – how are you thinking about your ZScaler investment? I thought the report was fairly strong as well, but here’s where I’m struggling:

We know that billings is a great leading indicator, and we know it was a weaker than expected last quarter. The problem I see is that by only raising their FY Billings estimate by $5M, we can imply that their Q4 billings will be in the mid-20%’s.

This strengthens the probability that their growth guide for the next FY will be weaker than the market might have expected before the report. I actually think there’s a realistic chance that their revenue growth guide also comes in the mid-20%’s too as the law of large numbers starts catching up with them.

–

We may qualm about a few percentage points, but then we can look for another catalyst. What if growth does slow to that range (or even less than expected), but they manage to really ramp up their profitability? We’re starting to see signs of that, with non-gaap OpIncome coming in at 15%.

Well, then the problem is that SBC is still extraordinarily high, at 48% of revenue. Despite only increasing 7% QoQ, it’s going to take a while to come down to something reasonable.

Perhaps I’m doing too many mental gymnastics, but it’s hard to avoid not doing so because the market has really humbled me. Or maybe you’re seeing things much differently?

-RMTZP

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No, it was 29%. You’re probably looking at the 6 months SBC.

I agree…this is good and will keep getting better.

They said Q3 will be down 9% sequentially (seasonality) so that’s 449m. That implies 662m for Q4 which would be 27% billings growth even if they don’t raise it again.

Sure, I do think revenue growth in the 30’s will come soon. Not sure about the 20’s – but maybe. But that’s ok if so – seems to me that’s more than priced in. I’m looking for long term growth durability here. If they can grow faster than this short term, that’s just gravy/upside.

Bear

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Bear

I am curious about your high cash allocation and the reason behind it. Can you please elaborate more on this?

It perhaps could be one of the following?

  1. You do not see any other interesting companies to invest in.
    Maybe start looking outside of tech or change your screening criteria.
    Related question: What are your investing criteria? What are you looking for in a company to be convinced that you should invest in it?

  2. You have a buy list ready and are waiting for better prices.
    If you are waiting for better prices, are you expecting another market leg lower? or something else?

Maybe you just need the cash on the side as a safety net. And that’s ok too.

Sorry I have more questions about your portfolio than feedback. Since you asked very sincerely, I decided to chime in here. Most posters ask for feedback and then get upset when an alternate POV is provided.

For my portfolio, I am 90% invested at most times. I try to always keep about 10% cash for opportunistic buys as they manifest themselves. But then it vacillates between 2% to 18% depending on whether I buy the dip or sell the rip.

Ignore my questions if they are off topic.

Cheers!

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It is not #2 – I’m not sitting on a buy list and just waiting for better prices. I own shares of the companies I am currently comfortable investing in. I just don’t want to allocate more to these companies yet. Some of that may be price. More often it’s uncertainty about whether or not I’m right about the company.

But I agree with the premise of #1. If I could find more companies to invest in, I wouldn’t have so much cash. But I don’t want to lower my criteria and invest in things like Gitlab or SentinelOne, businesses about which I’m not convinced. My criteria are similar to Saul’s. I look for a dominant company that seems to be doing better and better. I like recurring revenue and large gross margins. But honestly, I’m not seeing many that are doing better and better, and that’s partially the environment we’re in. That said, if you have suggestions, I’m all ears.

Bear

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I recommend looking at other sectors or industries. And you do not have to dilute your expectations or criteria to find good companies to invest in.

Today, some of the strongest secular tailwinds are in the areas of semiconductors, cybersecurity, cloud, AI, robotics, e-commerce, data sciences and clean energy.

Each of these sectors have dominant companies that are growing faster than their competition…AND…many of them are selling their products/services via a subscription model…AND…have high margins, expanding margins, expanding cashflows and lower trending shareholder dilution.

You have some of these sectors represented in your portfolio, not all.

Consider a company like NVDA. If you don’t like semiconductor chips, thats ok. Take a closer look at their Nvidia Omniverse full stack platform as well as their Nvidia Drive platform. They are selling each of these under a subscription model to industrial customers and auto manufacturers respectively.

Similarly take a look at AAPL. They now have 935M paid subscriptions, up more than 150M during the last 12 months and nearly 4x from 5 years ago.
Boring mega cap stock…sure…but…
Apple’s market cap has grown 250% since 2018 and they reduced shareholder dilution more than 15% over that timeframe.

My point being that high-growth subscription businesses can be found in more places than just cloud or software.

Here is another thought: Look for companies that are expected to grow at a higher rate in Q4 2023 versus Q4 2022. I am looking for similar such stocks that are pivoting to higher growth this year. To find them, we have to stop referring to mgmt guidance in the Q4 earnings reports and look at updated analyst estimates (based on updated revenue pipeline and discounted cash flow analysis) for the next 4-5 quarters.

Two companies that will pivot this year to higher growth: AAPL and NVDA.

I have been saying this a lot recently. In this environment, investors need to be flexible…be open to different ideas…be ready to shift from being a just bullish or just bearish…be ready to accept that the hey days of 2020 and 2021 might not come back…be like water…(Bruce Lee circa 1971).

PS. Please ignore my response and ideas if they are off-topic or “nonsense”

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Hi Bear, many thanks for your update and take on individual companies as well as for addressing questions.

I would like to make a friendly challenge to the above statements though, as they need the qualification “within SaaS.”

ARKW is +25.5% YTD at the moment so things have been far from bleak for growth in general in 2023 so far given that SPY is +2%.

I have heard plenty of what to me felt as good to great calls after Q4 such as INSP, SWAV, TMDX in the medical devices area, FOUR in fintech, KNSL in insurance, CELH and DKNG were good I thought in consumer staples, AEHR and to a lesser extent ENPH in solar/EV, TTD had what I thought was a strong call, MELI of course.

I am not a fan of what has transpired about many SaaS companies (too dependent on each other for revenue growth), but I thought that analytics (AYX, SNOW) and cybersecurity (PANW, ZS, CRWD, S) all did well in context and I think that others have become overlooked and left for dead.

But companies in other sectors had much more upbeat calls. Just my 2c.

Again, thanks for posting; I always appreciate your takes on individual companies whether I agree or not.

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MAS4R and Beachman,

I appreciate your thoughts. The problems for me are that the companies you mentioned are lacking in other areas. Either there doesn’t seem to be much recurring revenue (or if there is, it’s only a small portion of revenue), or growth just isn’t there…NVDA for instance actually seems to be a turn-around story – revenue dropped 21% YoY last quarter.

Please let me know if I’m missing something.

Bear

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The CEO addressed this in the first paragraph of his prepared remarks on the CC. Amended and shortened by me:

"For the quarter, our revenue grew 52% year-over-year and billings grew 34%. Billings were impacted by new customers being more deliberate about their large purchasing decisions at the start of the calendar year. These deals have not gone away, and we have closed a few already in February.

In select instances where timing of budgets was a hurdle for new customers, we enabled them to ramp into larger subscription commitments. These strategic deals lowered our first-year billings, but will grow into a higher annual run-rate level in the second year. We typically have some ramped deals each quarter, but in Q2, the impact of ramped deals on our billings was higher. These ramped deals position us to expand the customer relationship over time to create long-term value."

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Bear, I am still puzzled and amazed that you look down your nose at Sentinel the way you do. We simply don’t have ANY other company that is growing like Sentinel in these macro conditions.

Revenue up 92%
ARR up 88%

Tomer Weingarten, CEO . - We continued to deliver leading growth and margin improvement. Our ARR crossed half a billion dollars, and our global customer-base exceeded 10,000 - two major milestones. Our sights are set much higher. We continue to strengthen our technology leadership. Once again, we are a leader in Gartner’s Magic Quadrant for Endpoint Protection Platform and achieved the top ranking across all three Gartner’s Critical Capabilities for Endpoint Protection Platforms.

Dave Bernhardt, CFO - Our fourth quarter results exceeded expectations across all key metrics, indicating strength of our competitive position and unit economics. Evident in our fiscal year 2024 outlook, we expect to deliver compelling top line growth with consistent margin improvement.”

Fourth Quarter

· Total revenue up 92% to $126 million, compared to $66 million

· International revenue was 35% of total revenue and grew 125%!

· Annualized recurring revenue (ARR) up 88% to $549 million

· Total customer count grew 50% to over 10,000 customers.

· $100k customers grew 74% to 905. ["Keep in mind that this is dramatically understated as we don’t count the customers serviced by our MSSP partners ".]

· NRR remained above 130%.

· Adj gross margin: was 75%, up from 66%.

· Adj operating margin: was (35)%, improved from (66)%.

· Cash was $1.2 billion

Full Year

· Total revenue up 106% to $422 million, up from $205 million.

· Adj gross margin was 72%, up 9 points from 63%.

· Adj op margin was -49%, up 36 points from -85%

Shareholder Letter and Conference Call

We are winning in a significant majority of competitive situations—our win rates increased in the fourth quarter, including against large next-gen competitors. Customers most commonly select us for our performance and breadth, ease of use, and superior platform value. Our momentum with large enterprises and expanding platform adoption continues to drive increasing ARR per customer. We secured many prominent large wins ranging from U.S. federal agencies to global financial institutions and technology pioneers, spanning both endpoint and cloud footprints.

Global economic conditions remained similar to last quarter. We continue to see customer cost-consciousness and prudence around IT budgets, which has led to longer sales cycles and deal right-sizing. We expect these dynamics to persist. Customers are evaluating deals to ensure they are getting the best product and value at a rational price. Fundamentally, the enterprise need for cybersecurity remains mission critical.

Our AI-based security and platform approach allows us to be flexible in meeting diverse budgetary needs and deliver our customers a favorable cost of ownership, especially important in today’s environment. Our platform solutions including endpoint, cloud, identity, and security data are among the top IT spending priorities. Entering FY24, our pipeline nearly doubled year-over-year and continued to build at a record pace thus far. Our competitive position is stronger, and we are proud to protect over 10,000 enterprises around the world. Our top priority is securing tomorrow, with a relentless focus on technology leadership, trust, and transparency.

Cloud - We are excited to announce the expansion of our cloud security portfolio. As a technology leader in cloud workload protection (CWP), we are partnering with Wiz, the leader in cloud security posture management (CSPM). This is more than just a collaboration, it is an exclusive strategic and go-to-market partnership giving enterprises access to best-of-breed cloud security solutions.

Our Singularity platform has the first and only unified security data lake with EDR hunting and querying capabilities. Our platform ingests petabytes of data across hundreds of trillions of events, serving millions of queries in just sec- onds. Disparate solutions and vendors for EDR and security data lakes saddle enterprises with high costs and com- plexity. Every SentinelOne customer gets access to our unified Singularity data lake. There is no separate solution.

Singularity Cloud once again remained our fastest-growing solution in Q4, followed by strong contributions from other emerging solutions like Data Retention, Vigilance MDR, and Identity Security. We have just begun to scratch the surface of a significant cloud security opportunity. We’re winning sizable deals, including several multi-million dollar wins that can easily match or exceed the size of the endpoint deployment for these customers. Early deployments for many customers are just a fraction of their total cloud footprints. We’re excited to expand our cloud security portfolio by partnering with Wiz. Given our expanding customer base and growth opportunities, we believe we are still in the early innings of a large expansion opportunity.

Partner ecosystem - For years, we’ve taken a partner friendly go-to-market approach, where we enable their business instead of compet- ing against them. This is especially important for strategic partnerships like MSSPs. We’ve architecturally designed capabilities that enhance these relationships, like multi-tenancy, automation, and role-based access control. Many of the leading MSSP providers have built successful practices on top of our Singularity platform. Our extensive and diverse network of channel partners that’s very hard to replicate. It’s not just a package design - but a true competitive technology moat. These product-driven differentiators fuel ease of deployment, scaled management, and robust integration capabilities. We believe this makes us the partner of choice for MSSPs across the globe.

Op cash flow was $(22) million, worsening from $(6) million a year ago.

Free cash flow was $(25) million, worsening from $(7) million a year ago.

Guidance - For the first quarter, we expect revenue of about $137 million, up 75% year-over-year. [That means above 80%, well above anyone else].

For fiscal year 2024, we expect revenue of $631-640 million, reflecting growth of 51% at the midpoint [with 4 chances to raise it].

Cyber security remains a top IT priority, driven by a fervent and evolving threat landscape. At the same time, we are mindful of the near-term challenges impacting IT budgets. We expect the macro-related uncertainties to persist for the full year, which is factored into our guidance.

Our Glassdoor ratings are near perfect at 4.9 and easily the highest among peers. I’m proud of Sentinel being named as the best workplace in technology in Fortune’s U.S. ranking for 2022.

My take : This is now **one of my highest conviction companies, short term at least (maybe tied with Monday)…

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That’s worse even on a percentage basis, with FCF going from -11% of revenue last year to -20% this year. How will they turn this around? How will they eventually show a profit? I wouldn’t worry so much about this if they were truly hyper-growing. But remember they made a huge acquisition less than a year ago. They lap that just after Q1 where they’ll grow 80% or so inorganically. In Q2, they’ll grow around 50%, and if Crowdstrike is a model, they will continue to slow from there.

Frankly, my reasoning is very rudimentary: I don’t see how they’ll ever reach meaningful levels of profitability. They can probably reach break even in a couple years, but by that point they’re not going to be growing fast enough to start throwing off tons of cash. If I put on my rose colored glasses…maybe by that time, they can innovate and add products and new lines of revenue, and they can keep growing faster than I expect…but you can see why the market (and I) discount SentinelOne severely. Sure, that makes the stock currently “cheap,” but I think that’s because the market doesn’t know how much cash flow to expect, and when, and for how long.

Bear

PS To make matters worse, their SBC is an the highest of any company I follow, at 37% of revenue (and that’s down from 40% and even higher recently). Assuming they want to continue to continue to reduce that (to say, under 30% like all of our other companies), it’s one less lever at their disposal. Paying for things with SBC instead of cash would of course help FCF. They won’t be able to do that much.

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Can SentinelOne ever become profitable?

We know that management has a target for NON-GAAP operating profitability by calendar year 2024. I decided to model the revenue, Gross profit and Operating Income for the next 5 years to see how they could become profitable.

First a few comments from the earnings call:

  1. It is clear that they will have to do more with less. The focus internally is on enhancing the performance of everyone as there is no more unlimited budget to hire extra people:

"I’d like to share progress on our recent initiatives undertaken to elevate execution and enhance team structures. As discussed last quarter, our focus as a team has been to elevate our execution and performance management. These are important ingredients to scale the business.

We have intentionally made enhancements and incorporated performance management into our operations and it’s already having a positive impact on our delivery, innovation roadmap and financial performance.

We’ve made significant investments in innovation and talent over the past few years. This gives us ample runway to deliver against our product road map and growth targets. We expect to benefit from operating leverage as we moderate headcount growth and continue to unlock more productivity in fiscal year ‘24 and progress towards profitability."

  1. They are mindful about extra costs and taking on new business initiatives such as M&A:

“I mean obviously, this market is not so great of some of the private companies out there that might have some really, really interesting capabilities for the years to come. And on the flip side, obviously, as we were striving towards profitability, we also want to be very mindful as to how much we invest in building new capabilities.”

Me again: OK - besides the comments from the earnings call: How much can the operating costs grow over the next 2 years if they want to achieve operating profitability by 2024? The answer is, as seen in my model, roughly 15% per year.

If I model 54% revenue growth in 2023 and 45% growth in 2024, and at the same time 15% OPEX growth in both years, the non-gaap operating income margin will be 2% by 2024.

Is 15% short-term OPEX growth realistic? Let’s take a look at the sequential OPEX growth from Q2 to Q3 and then Q3 to Q4? OPEX grew 2.2% sequentially from Q2 to Q3 or 9% annualized. From Q3 to Q4, OPEX grew 4.5% sequentially or roughly 18.8% annualized. This is close to the 15% annualized OPEX growth that should be achieved. In fact, OPEX grew, on an annualized basis, 14.2% from Q2 to Q4. Therefore, this doesn’t seem to be an unrealistic target.

In the longer term, I don’t think that 15% OPEX growth is realistic as at some point in time, more headcount will be required to support the overall growth of the company, so I am assuming an increase in OPEX growth after 2024.

Here’s the model (click on the picture to see all text):

[Album] imgur.com

The model suggests that if they can sustain the cost control as evidenced from Q2 to Q4 this year at least for the next two years, they will be profitable in 2024. It also shows that if they can sustain cost discipline in 2025 and beyond, although with room to increase OPEX growth towards 25%-30%, there’s a path towards 10% operating margins (and higher). Note that CRWD currently has 16% Non-GAAP operating margin.

I think that SentinelOne has the right product in place to achieve durable growth as in my forecasts. They are winning market share from MSFT and CRWD (at a very small scale however), and there’s still a couple of years of legacy displacement ahead in endpoint, especially in the SMB/mid market where SentinelOne is strong. Secondly, it does seem that their cloud solution is gaining traction and could support durable growth when endpoint will reach the saturation point in the future. From management comments, I get the impression that they already have the team in place today to support the growth ahead at least for the next few years.

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Without wanting to restart the SBC wars again (hell, please no), I still feel I need to say this as I have thought quite a bit about SeltinelOne’s SBC and my (I now believe flawed) attempt at comparing SBC between our companies in my January portfolio review.

I now believe that comparing SBC expense between the companies we follow is currently meaningless. Imo dilution is really the only way to compare companies meaningfully wrt SBC.

The reason for that is that when comparing companies like ours, we need to take into account the environment in which they listed, we need to really understand exactly what each company did and what assumptions went into valuing each issue of SBC. And I don’t think that’s time well spent. At least not for me, so I think ignoring SBC expense and focusing on dilution is the way to go.

On to SentinelOne’s SBC as an example: most of the current years’ elevated SBC expense is due to incentives (RSUs/Options) that were issued to employees in 2021 and more precisely in the latter half of 2021 as they IPO’d in June.

Now as you’ll recall SentinelOne’s and many other co’s on this board’s share price peaked somewhere end 2021.

They valued a lot of share incentives at extremely high values back then. But they are expensing those now, of course without reducing the value of the incentive being expensed (because you’re not allowed to under GAAP rules).

Here’s the note for RSUs - which were valued using $57 per share end 2021

As of January 31, 2022, we had unrecognized stock-based compensation expense related to unvested RSUs of $77.0 million that is expected to be recognized on a straight-line basis over a weighted-average period of 3.7 years.

And for unvested options:

As of January 31, 2022, we had unrecognized stock-based compensation expense related to unvested options of $148.6 million that is expected to be recognized on a straight-line basis over a weighted-average period of 2.8 years.

And milestone options:

As of January 31, 2022, we had unrecognized stock-based compensation expense related to unvested milestone options of $16.3 million, that is expected to be recognized over the remaining implied service period of 4.6 years.

Now bear in mind that those options were valued using assumptions that would make us all blush at this point in time. The big inputs that are different to now are the stock price (much higher back then than today → options valued higher back then) and interest rates /risk-free rates (much lower than today → options valued higher). They tell us they used a range of 0.8% - 1.1% for the risk free rate!!

If those same currently unvested incentives were valued now, they would be valued far, far lower than the values that SentinelOne has to expense

The problem is that, because of this, comparing SBC between companies is not useful in the case where the assumptions used to value stuff that hasn’t actually yet vested moved by as much during the vesting period as it has in the last year.

Have a look at page 106 of the annual report for the details.

-WSM

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Long history as a tech worker here, and I see the leaving of the Sentinel execs to join Crowdstrike especially disturbing. You often see top guys leave the entrenched for the sexy smaller fleet companies, but this is very different. I am firmly in Bear’s camp here and question their ability to maintain enough growth to see them thru it. Durability is the issue.
CRWD is in a position to continue to pour money into R&D and play marketshare war if need be. They maintained revenue growth better than others, but their margins slipped in doing so. That worked in 2020 but that’s precisely NOT what the market wants to see today. I read the defector’s move above as a clear sign that Rubenslash’s model is going to be harder to execute in life than the simulation.

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Something else to consider. One of the largest Sentinel shareholders was Dan Loeb (Third Point LLC). If you followed the Upstart saga, you might remember he was one of the largest investors there also. He sold all his UPST shares during the drop from the major pump. He appears to be in the process of doing the same thing with S.

Here is the number of shares he reported owning at the end of each quarter over the last year:
2021 Q4 - 26 Million
2022 Q1 - 26 Million
2022 Q2 - 21 Million
2023 Q3 - 19 Million
2023 Q4 - 10 Million

One of the largest investors is cashing out with the stock at very low prices. This amount of selling is surely a big part of what is keeping the price down.

I don’t follow this stock closely, but from what others have said, it sounds like they are buying market share - probably with pricing a lot lower than CRWD. Maybe they can eventually raise their prices to a more profitable level, but maybe not.

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