I think it’s pretty straightforward. Every company is being conservative with their estimates in this environment, the problem is the epic slowdown. Last quarter they did 92% revenue growth, this quarter 70%, and next quarter they are guiding to 38%. Even with a solid beat next quarter, their growth rate got cut by more than half within 3 quarters. Add on to it they are a major cash burner and the market has responded as most would expect in my opinion.
8 Likes
@philiproth , if you just look at all the growth metrics on their earning report, it’s already extremely terrible! The answers in the Q&A was not the primary cause of share price drop, but the disppointing results were. Their sequential growth now now even fell behind Crowdstrike, with a much lower ARR run rate. The sequential increase of 100k plus customers were only 12 in the entire quarter! This report was far below anyone’s expectation IMHO.
Luffy
9 Likes
Growth is bad, no question, but they’re talking about margins and the path to profitablility. Didn’t BILL make a similar decision a few months ago? They were widely derided here at the time but since then the shares are up handsomely. S beat estimates and their own guidance for both EBIT and GPM, while raising their 2024 EBIT guide by 6.4%.
5 Likes
BILL had plenty of customer growth (though the FI customers were admittedly weaker than core) and never had to state down.
S has now screwed up ARR projections three times since making its acquisition. It significantly missed the “hi-$50’s” call a few quarter ago despite being 30 days into a 90 day quarter. It than missed the initial FY ARR guide for the current year. Now, it’s admitted it apparently doesn’t know how to calculate ARR.
The bottom line is this was a bad report with a pessimistic outlook no matter how you slice it. Yes, they are now talking margins and the path to profitability. The question becomes just how much you want to trust management’s word on that given its recent track record.
Caveat emptor.
25 Likes
Saul, it would be great if you can share your thoughts on sentinel one’s report. You had high allocation and conviction on this one.
FYI…I added last night but today’s price action has convinced me to move on. In addition to board’s general consensus, market action is telling me this is bad apple.
I will reconsider this if share price can atleast go back above $16 (this would be market action negating current judgement, which is how net/snow acted)
5 Likes
Let me chime in here and add my voice to stocknovice’s, as S was my second-biggest allocation stock just 1 day ago at 15% and I’ve been following them for a while.
The thesis was based on 1) them taking market share from their competitors 2) them hitting their revenue guidance and thereby growing exceptionally fast and 3) expected cf positivity by year-end.
All three of those were blasted apart in their call yesterday and then some.
- They grew revenue 5.8% qoq at $133m. CRWD grew 8.7% qoq at $693m - five times the size and growing much faster!! S is NOT winning. Their revenue growth has come to a screeching halt. They are growing at a qoq annualised rate of 25% atm. This is their qoq growth over the last several quarters. It takes a special type of analysis to get that to look good:
| QoQ | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2020 | 26.4% | |||
| 2021 | 17.0% | 15.6% | 18.8% | 21.5% |
| 2022 | 24.7% | 22.8% | 22.3% | 17.1% |
| 2023 | 19.4% | 30.9% | 12.5% | 9.4% |
| 2024 | 5.8% |
Last quarter I also looked at ARR and noted that this looked hunky-dory and growing faster than CRWD. And that ARR strength pointed to good things ahead. Because ARR is forward-looking!! And here comes the really big problem. And supposedly RECURRING!!! Excuse me but this is important and if people don’t get this then they need to pay attention. ARR is recurring revenue at the end of the period you are reporting on. So you could theoretically have almost zero incremental revenue in a quarter if you signed up all of your new business on the last day of the quarter, and that new business will show in your ARR (and to state the obvious - point to a good quarter ahead).
And they misrepresented ARR for the last several quarters. They included NON-recurring usage-based revenue in that number. So ARR was actually lower than what they thought and what they told us.
And this caught the management team by surprise! They couldn’t understand why their revenue was falling short in this quarter relative to their guide, given their great ARR numbers. Then, when the CFO delved into the ARR of all of their customers - only then - did they realise that their ARR was too high and included usage-based NON-recurring revenue. And because it was too high and it is a forward-looking number, the penny dropped for them and they had to restate ARR lower. Imagine the oh dear moment there. And once they realised that, they had to also face the music and lower their guidance for the remainder of the year.
So even though the ARR snafu is not directly visible in the P&L, the fact that they overstated that number led me and others to project the ARR forward and come up with relatively rosy future revenue numbers. Not only me, but also them! They - the CFO - did that and therefore gave too rosy a guide before realising his mistake.
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They missed their revenue guide for the quarter. Big no-no. Revenue was $133.4m vs a $137m guide. The FY guide was $631m-640m and they lowered that to $590-$600m - but can we trust them to hit that now? Point 2 of the thesis in tatters.
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They stated that they would get fcf positive end of this year. They did not give an update in the prepared remarks, but one of the analysts dragged it out of the CFO, who grudgingly admitted that this will not happen until 2025.
That’s on top of what can only be described as incompetence in reporting ARR. As CFO you either deliberately misstate your numbers or you do it because you did not get it right despite your best efforts. I don’t think there was anything deliberate here, so that means the CFO and team made such a rookie mistake by simply fumbling the ball. That’s not good enough for a listed company CFO imho and for an important number such as ARR. That’s forgivable in amateur sport, not professional…
The call was an absolute shambles. Their answers were not convincing, the tone was almost shell-shocked and the analysts were (understandably) acid. Just listen to how the CEO ended the call - that says it all.
It was a terrible call.
I feel lucky to have hedged my position somewhat going into earnings and to have gotten out at above $14 today. I sold everything. The numbers tell a story of rapid deceleration and of losing against competitors. In addition I have lost faith in the company and management.
-wsm.
105 Likes
@wsm007 this is extremely helpful…I want to appreciate you explaining rationale to purchase and sell.
15 Likes
Of course I’m not speaking for Saul, and I’m interested to hear his thoughts (just as I was interested and impressed to hear wsm), but in the spirit of the ‘office pool’ my money is that Saul sold his entire position without a second thought in the after-hours Thursday. It’s one of the remarkable things I admire about his strategy, his ability to cut and re-allocate when the conviction turns.
I myself still can’t bring myself to sell 100% of my position when I feel I got beat by the algorithm. Sold some, sold some more this morning, and I’ll wait until there is some technical recovery (not allowed to elaborate here per board rules) to offload the last tranche (Yes: I’m of the opinion that there will be some recovery in the near term that is better than just cutting my losses entirely and re-allocating what I have left across other positions. Sometimes it works, sometimes it doesn’t (past experience with UPST, LSPD, AMPL).
18 Likes
Here’s my take. I’m not just out of Sentinel, I’m out of cyber security completely. As Kurtz said, “The market is fragmented” and that’s so true. The competition is fierce. ZS is one of the few in this area to have a good day. But Prince, CEO of Cloudflare says that they are competing with a network zero trust offering. Is it as robust as ZScaler, I’m sure not, at least for now, but that doesn’t mean Cloudflare is out of the competition. And actually it’s probably not even very relevant. So long as the average retail investor thinks it’s competitive, the stock price will follow the sentiment.
To be honest, I was not as perceptive as @wsm007. Even though it’s right there in the name Annual Recurring Revenue, I didn’t immediately put it together. But the fact that they were restating past performance along with future guide, the fact that they admitted to counting eggs rather than chickens was sufficient for me to bail.
Initially I thought I’d put the money into Crowdstrike. But after giving it some more thought, I decided that I just didn’t want to hold any cyber security shares.
I’ve come to the conclusion, painfully and late, that the whole segment is just not where I want to be invested. There’s lots of other companies that I have more confidence in than any of cyber security companies. Even though every corporation (well most anyway) put cyber security as a top priority, it’s pretty hard to determine which security company will benefit sufficiently to grow fast enough to be the company I want to invest in.
29 Likes
Well, I had a 12.5% position at the end of the May, and I have a 3.9% position now, which is less than a quarter the size, so I guess that that answers your question.
Saul
35 Likes
Saul, it looks like you sold a little more than half of what was left after the drop. Is that because you still have confidence in the company?
Management has lost credibility and will be tested the next couple of quarters. If they prove themselves, Sentinel could recover nicely. Though I see why many don’t want to wait for eggs to hatch.
I’m still sitting on a 6.64% position.
8 Likes
I posted this back in March:
"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."
FWIW - Dan Loeb now owns zero S. Was an early investor and sold out completely near the lows.
Stock is near all time low when other growth stocks have bounced back 80% - 100% from lows.
Now they are not going to be fcf positive until 2025 - if you believe them on that. They will probably need to do a capital raise at some point - with very low stock price. Continually lowering stock will make it hard to hire and retain people. If you were a major corporation, would you want to invest your security in a company that is probably going to be struggling to hire and retain talent?
Look at that volume bar from Friday. If the stock price breaks below the pink line, I would not be optimistic.
wsm007 - thank you very much for your explanation. I would not have understood any of that if you had not taken the time to write it out. I am less charitable than you - I assume they knew exactly what they were doing.
21 Likes
Liquidating 26 million shares over a bit more of a year… isn’t going to have a big effect on the stock… considering daily volume is nearly 8 million.
Performance of the company has been the drag on the stock. Company performance having an effect on stock performance? Who knew? 
Rob
He is no fool who gives what he cannot keep to gain what he cannot lose.
13 Likes
"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"
I should have been paying closer attention to that. It would have saved me serious loses in SentinelOne.
One of the patterns that I have learned over the years is that it’s not always good to follow Loeb into a stock, but when he sells down on his way out of a position, wherein he had accumulated a hefty stake, it is among the most reliable indicators that I know of that the story is about to unravel. Off the top of my head are not only Upstart that you mention, but also CANO health. There was another that impacted my investments but I can’t come up with it at the moment.
In each case that I know about, he had lost confidence in the company leadership.
When/if S leadership reprices options for executives, it should remove all doubt that Weingarten, brilliant as he is, has a value system that does not place his fiduciary responsibility to all shareholders front and center. Excess executive compensation has been out of line all along, and now poor sales execution and accounting restatements uncorked out of the blue.
Anyway, following Loeb out of a stock has seemed like a good idea from my experience. That’s not always true with other gurus. For example, Buffett sells are often followed by a durable rise in the stocks.
16 Likes
Rob,
The “reported” performance of the company was pretty good until the ER 2 days ago - that is why many here owned it. But the stock has been going down for the last 1.5 years in spite of that good performance.
3 Likes
Hmmm… I guess that’s where the word “performance” has different meaning for different people. I’ve shifted to looking for companies that make money.
Some folks claim…personally, I’m not sure… that the market has been looking for the same thing and “those folks” (reported in articles) claim that’s why many money losing companies have lost market value. Just rumor perhaps…
Rob
He is no fool who gives what he cannot keep to gain what he cannot lose.
9 Likes
Good points have been brought up as to why this was a bad quarter - the market obviously agreed and took the price down by 35%.
I can understand why investors are running for the exits, the drop however is very harsh, which is why I opened a speculative position in $S on Friday (may change my mind as new data evolves). I agree with a lot of the comments, though here are some things I considered before opening the position:
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This marks the first quarterly miss for $S since becoming public
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Post full year guidance reduction, the growth is now forecasted at 42% and therefore still the highest full year guidance across all companies. Since consumption was entirely removed from ARR, any uptick in consumption will create tailwinds for revenue.
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SAAS companies which previously guided aggressively are taking the guide down too. $SNOW from 50% to 40% to 34% -, $GTLB from 40%+ to ~25%, and even more predictable companies like $NET from 38% to 32%). It’s not isolated to just $S.
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EV/NTM Revenue is now approximately 4.6x (~$702M Revenue & reduced cash of $718M). So a steep discount, though it could get cheaper should we not see a floor on growth slowdown.
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Is it completely unreasonable to include “predictable consumption revenues” into ARR? it worked in the past, however it does not seem to work in this macro. One thing to watch is if these consumption slowdowns also lead to customer retention issues.
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The change in calculating ARR and affected underlying metrics could have created a lot of confusion (basis for price algos determined). One example is the growth for 100K customers. This quarter includes the new calculation method, and therefore it needs to be compared against reduced previous reported numbers. If we subtract 5%, last quarter would be 859, for a net add of 58. That is still a significant slowdown, but not as bad as 12 added. The algos could have just taken 12, and this metric is extremely important for future growth projections. You can see this discrepancy when looking at their reported YoY growth of 61% for 100K customers vs what looks like 55% when compared against the previously reported number of 591 (Apr 2022).
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The customer growth did see acceleration in Jul 2022, eg. QoQ growth for 100K customers went from 13.7% to 27.7% (organic excl. Attivo might have been closer to 19%). I’d be curious what Jul 2023 looks like factoring in some seasonal slowdown in Q1 and deal slippage specifically called out for this quarter (are deals closing in Q2?). This metric really needs to start improving ASAP!
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Crowdstrike stopped reporting customers alltogether as of this quarter, they would not be doing this if it was favorable.
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The rapid shift towards improving FCF margins hurts smaller companies proportionally more. $CRWD is a well oiled machine, and the FCF margins are a lot more steady (~30-35%) as compared to $S (-70%-90% to -24%). This was one of the reasons I felt $S had no margin of error priced in prior to earnings. It’s a real challenge to drive such change through the organization while maintaining hypergrowth.
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Yes management made rookie mistakes - though it is a lot harder to run a company that has been performing like a speedboat, and now needs to reverse course and pump the brakes.
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The company has no debt, $1.1B in cash & path towards FCF breakeven looks achievable (while more at risk).
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It’s a tough one, but I am not yet convinced the long term thesis is broken, and at the current price I felt a lot of uncertainty is accounted for.
36 Likes
Great thread and I personally find your take very well thought out, @wycap.
I had S on top of my short list until this report but was put off first by the speculative run in the shares from around 14-15 to north of 20 and then by the report itself.
I guess the glass half full thesis has to do with the quality of the product. Back in 2021, a respected product analyst argued that S has the best performing product but that because it deploys the agent on each endpoint, it is a much more operationally cumbersome approach than CRWD’s lightweight one.
In Dec/Jan, I wondered why there was no reported (unless I missed it) takeover interest in S when the market cap was at about current levels.
If the product is that great and the company that cheap, why not buy it out?
If the product is that great, why is not S leading the way among the largest/deeper pocketed enterprises (or maybe it is and I missed the memo)?
I think this question applies even better to the current situation.
A high-quality product alone won’t prevent a company from failing but it should generate buyout interest. And if it does not, is the product really all that great?
So 2 years later, what do we know about the actual quality of the product vs. the competition in the context of real-life operations as opposed to hypotheticals benefiting one or another player?
EDIT: specifically,
if I am a large business, what is the S edge over everybody else, if any?
if I am a small business?
If I am a government institution or non-profit?
For me, I feel that I need to know the answers to such questions before considering S a bargain bin diamond.
And then I would also need to formulate a thesis about management being able to learn and move on.
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Thanks & agreed here @MAS4R - had I owned the shares prior to earnings I would have been inclined as well to hold on or conversely close any shorts during the run-up. The relative strength was very impressive, and it all seemed to prepare for the next move higher.
On the product side I think it would have been impossible to ramp up to over $500M in run rate, at such a rapid clip, with best in class retention rates - had it not been for a competitive product. Such performances are extremely rare, and I do believe it’s only possible with an exceptional product market fit & execution. Obviously $CRWD is taking $S seriously and they are trying to make their life more difficult at every level. My best guess is that $CRWD could have a more complete offering, based on the total effort going into R&D, as well as longer tenure in market. Perhaps $S built a better mouse trap in some important areas that resonate well with the market (e.g. more automation with respect to threat detection). But I really don’t know what the exact strengths/weaknesses are of both of these platforms - and it’s certainly possible that $CRWD has stepped up their game as $S became larger.
On the acquisition side it’s hard to tell whether there was inbound interest - and what Sentinels position was/is. Prior to macro conditions deteriorating the business was firing on all cylinders and a strategic deal could have been pre-mature. If there is any interest currently, perhaps it would be a good time to have discussions. Imagine if Microsoft acquired $S, they would compete head to head against $CRWD and could advance the product to the next level as well. Maybe even a legacy provider that is behind on the cloud, or if companies like $ZS/$NET if they want to expand their product portfolio.
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I run ZS and S on my laptop. The view from my IT group is that CRWD is the premiere solution but it requires infrastructure (people) to support it. Thus small companies like ours prefer S. But large enterprises prefer CRWD. It seems entirely plausible that smaller organizations are under more pressure in this downturn than large. Thus S is harder hit. It may not be that their products aren’t competing, it could be more that the segment of the market where their product is best positioned is under more pressure.
I have never been invested in S, but considering an allocation. Upside could be large if they can cross over to cash flow and continue to rapidly grow.
Rob
44 Likes