Why did SentinelOne shares plummet by 35% in a single day?

The highest-valued cybersecurity IPO in history was that of Israel-founded company SentinelOne, which has been managed since its inception by Tomer Weingarten. The offering, which was launched at the height of the bubble in 2021, was carried out at a value of $9 billion, yielded the company $1 billion in funding and guaranteed its financial stability over time.

However, quite a bit has changed since it went public. The high-tech market has slowed down, capital raising has stopped, and the manpower recruitment that characterized the previous years has been replaced by layoffs. At the end of last week, it was also the turn of SentinelOne to announce cutbacks, laying off around 5% of its employees. But this was not the only negative announcement by the company, which revealed in its reports on the first quarter of the year that it did not meet the revenue target, that it is required to correct previous reports, and also lowered future revenue expectations.

SentinelOne NYSE IPO.

Since the IPO, the company has radiated strength. It made a significant purchase in Attivo in March 2022, paying approximately $616.5 million for the cyber company, while maintaining steady growth in revenue and expanding its workforce. Within a year, the number of employees in the company increased from 1,000 to a little over 2,000, many of whom were previously employed by Attivo.

Just before releasing its reports for the last quarter, the company surprised the market and reported the layoffs of 100 employees, including a few dozen in Israel. Senior executives in the cyber industry in Israel told Calcalist that as soon as the first reports about the layoffs came out, there were two options, either the company would report a high revenue forecast and the stock would skyrocket or the company would reveal a disappointing forecast and the stock would crash. Since the second possibility is the one that ultimately happened, SentinelOne understood that it had to try to minimize the damage. The purpose of the layoffs, according to those executives, was to signal to the market that the company is willing to take any painful steps required to reach profitability. But even this did not help soften the blow to the stock, which suffered a 35% drop.

SentinelOne is a growing company that manages to increase its revenue from existing customers, which is a testament to the quality of its product. The company reported revenues of $133 million in the last quarter compared to $78 million in the same quarter last year - a 70% increase. In contrast, the company's operating loss increased from $90 million in the corresponding quarter in 2022 to $115 million in the current quarter. The lowering of the company's annual revenue forecast to $590-600 million compared to the analysts' expectations for revenues of $637.6 million also disappointed investors, especially in light of the fact that the company's previous forecast was for revenues of approximately $640 million. The company did not provide any good news for the coming quarter either, reporting a forecast of $141 million compared to an expectation of $152 million.

"If growth was the most important thing for the market until 2022, then today it is all about profitability and the market severely punishes forecasts that predict failure to meet the target," say industry executives. "A company like SentinelOne, which is a growing company but not yet profitable, must show that it is on its way there. This is the reason for the layoffs."

SentinelOne's announcement explaining the layoffs is worth reading carefully because it embodies the difficulties the cyber industry is experiencing. Beyond the multiple repetition of the word 'profitability', the company addresses the current global crisis: "Our company is strong and growing rapidly. But like any other company, we operate in a particularly challenging environment,” SentinelOne said in a statement. “To maintain growth and ensure we are on the road to profitability, we must adjust expenses and channel resources to focus on high-priority initiatives that will allow us to meet our long-term needs and those of our customers and partners."

The especially challenging environment in the company's announcement refers to the cutting of cyber budgets by some of the world’s biggest, which is reflected in the slower signing of new contracts with the cyber companies. Precisely because of this, the bright spot in SentinelOne's reports is that growth continues and contracts are being signed despite the general slowdown in the market. Companies smaller than it, which are currently forced to correct their forecasts and lower them sharply, may not be able to withstand the upheaval that such moves produce. Other cyber companies have no choice but to be acquired by bigger competitors, even if the value of the sale is lower than the amount the company raised or the value at which the company raised capital. SentinelOne is not in this survival game, at least for now, thanks to the large funding it carried out and the efficiency measures it is taking.

Alongside the reports and the announcement of the layoffs, the company reported that it had made an inaccurate calculation regarding its annual recurring revenues. This one-time correction of 5% and $27 million for the entire year embodies how problematic forecasts can be in this industry.