SentinelOne IPO: Investor Demand Fuels Potential Growth

SentinelOne's IPO and the Current Exit Market Landscape

A shift is occurring within the venture capital sphere, moving from early-stage investments to the super late-stage exit market. Today’s discussion centers on the initial public offering (IPO) of SentinelOne, a company specializing in endpoint security, and its relevance to Sprinklr’s recent market entry.

Further analysis of the public offering market will follow later today, as both Doximity and Confluent are scheduled to determine their IPO pricing after market close.

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SentinelOne's Debut: A Key Indicator

SentinelOne’s IPO, anticipated to be priced on June 29th with trading commencing on June 30th, presents a compelling case study. The company exhibits both substantial growth and increasing financial losses, making it an ideal benchmark for the current IPO market.

Its performance will reveal whether investors prioritize growth potential over immediate profitability. This week, the company released its proposed IPO price range, allowing for detailed examination and evaluation.

Why Late-Stage Exits Matter

The significance of tracking unicorn exits lies in their impact on startup valuations. The liquidity event of late-stage companies establishes comparable valuations for numerous smaller startups.

Moreover, the degree of public market interest in rapidly growing, yet unprofitable, businesses will directly influence the returns realized by venture capitalists, founders, and early employees.

Comparing SentinelOne to Sprinklr

Let's delve into SentinelOne’s cybersecurity IPO price range, using Sprinklr’s recent debut in the social media software sector as a point of comparison.

This comparison will help to contextualize SentinelOne’s valuation and assess investor sentiment towards high-growth technology companies.

Key Considerations

• Growth vs. Losses: SentinelOne’s combination of rapid expansion and increasing losses is a critical factor.
• Market Valuation: The IPO price range provides a valuable dataset for understanding the company’s perceived market value.
• Investor Sentiment: The IPO’s success will indicate whether investors are still prioritizing growth above all else.

SentinelOne’s IPO is therefore a crucial event for understanding the current state of the market.

The Value of Rapid Expansion

Investing in the shares of companies experiencing swift growth can often be a sound strategy. This explains why early-stage funding rounds for startups frequently involve substantial revenue multiples.

Consider a startup achieving $1 million in annual recurring revenue (ARR); why would investors assign a $50 million valuation? If the company demonstrates sufficiently rapid expansion – for instance, a 300% yearly growth rate – the revenue multiple paid during the funding round would decrease significantly over the subsequent year. This scenario would likely attract further investment at an increased valuation.

Effectively, an initial return on investment is realized, and the company secures additional capital from new investors to sustain its growth trajectory, validating the foresight of the early investment.¹ Venture capital, seemingly, is straightforward.

A similar principle applies to companies initiating public offerings. Growth is paramount, and a company’s worth is directly correlated with its revenue growth rate, as investors project future scalability (within reasonable limits). However, even rapidly expanding companies may face challenges impacting their valuation, such as substantial debt, inconsistent growth patterns, or declining profitability.

Let's turn our attention to SentinelOne. The company is experiencing rapid growth, but simultaneously increasing its financial losses. The following income statement illustrates this:

An income statement is an excellent way to begin the day, stimulating analytical thought.

As the data reveals, SentinelOne achieved approximately 100% growth between its fiscal years ending January 31, 2020, and January 31, 2021. Furthermore, the company’s growth rate reached 108% in its most recent quarter (ending April 30, 2021) compared to the same period last year. This indicates a sustained and robust growth momentum.

However, the company’s net losses, as shown on the bottom line, have also increased considerably. The rate of loss expansion accelerated in calendar year 2021, with a 54% increase during the full fiscal year and a 135% surge in the most recent quarter.

It is worth noting that SentinelOne’s share-based compensation expenses rose significantly during both the most recent fiscal year and quarter. Adjusting for these costs would lessen the apparent acceleration of losses, but the fact remains that the company’s growth is occurring at a substantial financial cost.

How are investors responding to these results? They appear highly favorable. Based on a price range of $26 to $29 per share, Renaissance Capital estimates a fully diluted valuation of $8.2 billion. This represents a significant increase compared to PitchBook’s previous private valuation of $3 billion in November 2020.

Consequently, SentinelOne is poised to more than double its valuation in under a year through its IPO. At an $8.2 billion valuation, the company’s revenue multiple could reach approximately 55x its annualized most recent quarterly revenue. This is comparable to the 50x multiple discussed in our earlier startup valuation example.

In contrast to the positive reception of SentinelOne’s IPO, other companies have experienced different outcomes. Zeta Global, for example, exhibited slower growth and priced at the lower end of its range, subsequently losing value. Sprinklr also priced its IPO at $16 per share, below its anticipated range of $18 to $20, and reduced the number of shares offered.

Zeta Global’s growth rate was 25% in its most recent quarter, while Sprinklr grew by approximately 19%.

Analyzing the IPO market is inherently challenging due to the limited number of public offerings and the difficulty of direct comparisons. However, recent market signals suggest a strong preference for growth, to the extent that investors are willing to overlook SentinelOne’s expanding losses and assign a high revenue multiple.

While both Zeta Global and Sprinklr are experiencing increasing losses, their slower rate of deficit growth was insufficient to generate investor enthusiasm.

Therefore, growth appears to be the dominant theme in the current IPO market, which suggests a positive outlook for the Q3 2021 IPO cycle, potentially including offerings from companies like Robinhood. Prepare for activity!

1. This is a playful exaggeration.