Sentinel One – A thought experiment
Sentinel One is a new forthcoming IPO company challenging Crowdstrike. It may be difficult for you to actually grasp how horribly bad their business figures are!
Based on the figures Gaucho Rico just presented, they have an operating margin of minus 127%. Now that doesn’t mean that for every $100 million in revenue they take in they are spending $127 million! Oh, No! That means that for every $100 million in revenue they take in they are spending $227 million!!! They are thus losing $127 million.
Now their gross margins are 53% which, by definition, means they are spending $47 million as the cost of every $100 million in revenue.
With me so far? That means their operating expenses are $180 million for that $100 million in revenue (47 plus 180 equals 227).
So what happens this next year. Let’s say they grow by 100% and double their hypothetical revenue to $200 million. And improve their gross margins from 53% to let’s say 56%. And let’s give them rapidly improving metrics and say they grow revenue by 100% but only grow operating expenses by 75%. What do we have?
Cost of revenue is 44% of $200 million or $88 million
Operating expenses are 175% (75% growth) of last years $180 million, which comes to $315 million.
315 plus 88 is 403, so their total expenses are $403 and revenue was $200. So this year, although doubling their revenue they are now losing $203 million, up from last year’s $127 million.
It’s an eight-ball very difficult to get out from behind. Sure they can say, “We improved our operating margin from minus 127% to minus 101%” but so what? They are losing 60% more money than they lost last year. That would probably mean big secondary to raise more cash to feed the money-losing business, and lots of dilution.
And you can do the arithmetic for the year after for yourself, figuring 90% growth, 59% gross margins, etc. It’s not a pretty picture.
I hope that this helps.