Authored By Louis Stevens
- This note was originally published to L.A. Stevens' Equity Research series on June 25th, 2024.
I wanted to share these ideas with you following the recent events with Crowdstrike (which, of course, relates to S1) and following Snowflake's recent announcement that it made Meta's latest Open Source AI models available for its Cortex product users, which represents Snowflake vanquishing the rumors that its AI products have not kept pace.
Again, please note these ideas were published on June 25th, 2024 originally, and I kept the original data from the original note.
So, without further ado, let's begin this journey of understanding the ironies of Snowflake and SentinelOne.
Snowflake & SentinelOne's Great Ironies
In today's note, we will spend time considering the trading dynamics and valuations of SentinelOne and Snowflake. Specifically, we will discuss the Great Irony™ of S1 and Snowflake operating from their greatest positions of strength ever while trading at or near their lowest valuations ever (in the case of Snowflake, it very firmly trades at its lowest valuation ever).
To summarize the thrust of what you will read today, as I just said (though it bears repeating), SentinelOne and Snowflake operate from their greatest positions of strength in their corporate histories bar none.
Their greatest positions of strength are concretely defined by:
- Greater product diversity than ever before, and, as such, more durable franchises atop more diversified revenues than ever before
- Massive cash balances alongside zero dollars in debt. S1 holds $1.1B in cash and $0 in debt, and Snowflake holds about $4.75B in cash and $0 in debt.
- Robust free cash flow margins of 18% and 40% for SentinelOne and Snowflake respectively
- And runways for growth that are arguably longer than they've ever been, in light of their product portfolio expansion and in light of the growth of data and cyberthreats
While the future is always uncertain, as many of the "valuation flippenings," such as Hims becoming worth more than S1 in recent months, have demonstrated, the indisputable reality today is that S1 and Snowflake operate from their greatest positions of strength in their corporate histories.
[Adding this ex post facto: The Crowdstrike situation, the Wiz IPO, and S1's trading dynamics in recent weeks certainly reinforce this idea.]
Recently, Hims Briefly Achieved A Larger Enterprise Value Than S1 After Being Valued At About 1/15th S1's Value In Recent Years
- This illustrates that the future is inherently uncertain, and outcomes that the market itself does not remotely expect often materialize.
Furthermore, in accordance with the thinking I've often shared over the last six months or so, we're currently living through what approximates a 1970s and 2000s redux, and this should be internalized.
By which I mean that the most adored, doted on, and promising companies of the last 10-15 years, which were consistently seen as such over this period of time, went from trading at astronomical valuations, during which time investors fervently bought them, to their lowest valuations in their corporate histories, at which point investors fled in droves.
We should appreciate what investors experienced in bygone eras so as to better understand what's going on in our current era. That is, in answering the question, "Could the market really be this inefficient and lose sight of the performance of these businesses?", using our understanding of history, we can very confidently say, "Yes, the market could get it this wrong to the upside and downside, and it can begin to ignore businesses that have gotten a lot better and now trade at cheaper valuations after adoring those businesses for many years."
It's happened before, and it's happening now.
Indeed, Snowflake and SentinelOne trade at their most depressed valuations in their corporate histories; meanwhile, investors have fled their shares in droves.
Enterprise Value To Revenue Multiple + Revenue Growth Rate, SNOW & S
Of course, logically, it would be natural to expect the market to acknowledge the strength of S1 and Snowflake and to trade their shares higher; however, as you are likely well aware, this has not been the case.
S1 and Snowflake have been traded relentlessly downward in recent months despite reporting objectively brilliant reports over the last two years and very much so in their most recent quarters.
Today, we will walk through concrete factors that communicate that S1 and Snowflake operate from strength and just reported brilliant numbers.
Snowflake
On the subject of investors fleeing their shares in droves, the shift in Snowflake's narrative has been quite noteworthy.
From October of 2020 to March of 2024, Snowflake was referred to as the Data Super Cloud™, meaning that it offered the full stack of data management services enterprises needed. From data storage to scalable compute to app development to data sharing to AI/ML tools, the Data Super Cloud represented a vertically integrated application layer atop the raw cloud infrastructure of AWS, GCP, and Azure.
As evidence of Snowflake's "superness," investors pointed to its meteoric revenue growth and exceptional software-related metrics, such as its 99th percentile net retention rate, the best among public software companies over the last four years or so.
Snowflake grows Customers At Incredible Rates & Expands Its Business With Those Customers At A Likewise Incredible Rate
- Note that FY = Fiscal Year, and FY '24 = Calendar Year 2023.
Snowflake's Meteoric Growth Rate
Investors pointed to its multi-product strategy, in which it layered new products and services onto its unique data warehouse platform that allowed its users to scale compute and storage independently leading to better and more cost-effective outcomes.
In 2020-2021, as the company traded at about $100B to $120B, it was a far less developed platform.
Its data-marketplace had fewer stable edges. It offered few, if any, AI/ML tools. Snowpark had not been released. Container services had not been released. The inevitable transition to Iceberg tables had not yet begun.
The Market's Ironic Pricing Of Snowflake
Snowflake's Data Marketplace Has Matured Substantially
Today, as the business operates from its greatest position of strength, having actually built out its Data Super Cloud, investor sentiment in the business has never been lower, as evidenced by the fact that Snowflake now trades very firmly at its lowest valuation in its corporate history.
The Data Super Cloud Illustrated Simply
It's really incredible: Investors piled into the stock when it was basically nothing. It was vastly weaker than what it is today, with far fewer products, less corporate maturity, and much greater uncertainty about its future.
It now offers a series of products, all of whom benefit from the adoption of cloud computing and the exponential growth of data, instead of just its legacy warehouse product.
It's now the platform investors doted on in 2020-2021, and most of these same investors are nowhere to be found today.
Cloud Computing Still Has A Long Runway For Growth
Q1 2024 Datadog Earnings Presentation
The Growth Of Public Cloud
Global Data Generated Continues To Grow Expontentially
Snowflake has built a multi-product platform business over the last four years since it traded at $110B+ and only offered one product.
And it's set to grow via those various products and those products are set to grow within the above illustrated TAM's growth.
In short, there's still a very long runway for growth ahead of Snowflake, and Snowflake is poised to capitalize on this runway in light of its exceptional corporate strength.
For a more comprehensive view of Snowflake's platform, I would encourage you to review its most recent investor day presentation. In my next devoted Snowflake note, I will dissect this investor day.
Turning to S1...
SentinelOne
- All quarterly report references are calendar year, not FY, so as to create less confusion.
SentinelOne is almost comical to me in that S1 indisputably had its best quarter ever in Q1 of 2024 (calendar year), in response to which the stock sold off 30%+ in about 24 hours.
For the first time in the company's history two specific events occurred that made Q1 its best quarter ever:
- It grew sales at 40% while generating 18% free cash flow margins, i.e., it produced free cash flow while sustaining hyper-growth.
- 40% of its newly booked sales were from its emerging solutions, i.e., its products adjacent to its original end point security product.
"The contribution from emerging solutions was a record in Q1, growing to about 40% of our bookings. Over time, our platform solutions will be an even more significant part of our business, driving diversity and long-term growth."
Tomer Weingarten, CEO, Q1 2024 SentinelOne Earnings Call
These two pieces of data represent a business operating from incredible strength. They are precisely what the market has looked for from S1 for the last two years, and, ironically, on the day that S1 reported these watershed-moment metrics, the market responded by selling the stock off violently; that is, the stock fell 30-40% in one day following its Q1'24 report.
Very notably, and I know I'm being redundant, but it bears repeating:
The market has wanted two very concrete and discernible items from S1 over the last couple years:
- Free cash flow
- Demonstration of its ability to grow via products other than its original End Point Product
And, in Q1'24, the market received both of these items that were demanded over the last two years; the absence of which has been used as fuel for the stock's price declines.
To give you an idea of why these adjacent products are important and represent S1 operating from incredible strength, take, for instance, the growth of its Cloud Security business.
It now generates about $100M in ARR and is growing at a healthy rate, and will likely do so for decades to come (due to its exceptional quality and its TAM's long runway for growth).
Cloud Security TAM For S1 & Crowdstrike
S1's Cloud Security Product Is The Highest Rated On Gartner
"The cloud security space continues to be a clear greenfield opportunity to engage with new enterprises regardless of endpoint incumbency. We've seen this time and again. Combined, we believe our Cloud Workload and Cloud Native security create the most advanced cloud security portfolio to protect critical enterprise infrastructure. We're excited about the growth potential as we move throughout the year."
Tomer Weingarten, CEO, Q1 2024 SentinelOne Earnings Call
S1's Cloud Security business serves to:
- Expand S1's TAM, i.e., expand its runway for growth, making its growth more durable
- Diversify its sources of revenue, which makes its business more durable. 40% of new bookings coming from emerging solutions represents a business that is rapidly, rapidly diversifying and serving an array of buyer personas. This dramatically lowers the corporate risk for S1, which, because forward returns are inversely correlated with starting valuation, and because risk = return, should push up on the company's valuation. Of course, as we know, the opposite has happened... yes, very ironically.
- Expand its avenues to Go To Market. S1 operates a land and expand model in which it upsells customers on its portfolio of products after wedging itself into their wallet via one or two of its best of breed products. With more products, S1 has more avenues to go to market and can be more efficient with its marketing spend depending on which avenue is performing the best at any given time.
In short, due to S1's newfound profitability and continued exceptional multi-product execution, the company indisputably operates from its greatest position of strength in its corporate history, while, quite ironically, trading at or very near its lowest valuation in its corporate history.
S1's Enterprise Value, TTM Revenue, And Quarterly Revenue Growth Rate
The market has priced S1 as if its growth is set to halt in perpetuity; however, its multi-product execution, best of breed products, and extremely long runway for growth, as measured by the overall cybersecurity TAM and the growth thereof, indicate that halting of growth is unlikely.
Projected Growth Of The Global Cybersecurity Market
Concluding Thoughts
To reiterate what defines the indisputable strength of S1 and Snowflake, I invite you to read the list of attributes that are present for both of these businesses as of today:
- Sustained hyper-growth for both of 30%+;
- Both are free cash flow positive;
- Both most robust from a product perspective they've ever been;
- Both have giant cash hoards and $0 debt;
- Both have giant runways for growth in expanding TAMs;
- Both have founder-technologists guiding product roadmap development and execution;
- Both adored for 10 years prior to being discarded in the span of about 180 days despite operating from their greatest positions of strength in their corporate histories (just a matter of data; not opinion; subject to change in the future, but this is reality today)
What's very notable to me is that, in late 2022, I saw these two businesses as operating from their greatest positions of strength in their corporate histories while trading at their lowest valuations ever.
Based on the way the market has traded these companies and priced them, you'd expect their strength and the pace thereof to have eroded materially since then.
But, very notably, both S1 and Snowflake have done nothing but strengthen immensely. So... as we know, there are no guarantees of the future; that said, the market has had a negative perspective on Snowflake and S1, and to a greater degree, S1, for the last two years, if not longer...
And what has been the result at the end of those two years?
Two businesses that are stronger than they have ever been, so the market has effectively been proven wrong for years now, and that's worth noting in the calculus of what will happen in the years ahead.
Considering the exceptional execution from both companies and considering their multi-product platform strategies and corresponding runways for growth... I am inclined to believe that Snowflake and S1 continue to defy the market's viewpoint and continue to grow at elevated rates for many years to come.
Disclosures:
L.A. Stevens has rated SentinelOne a "buy."
L.A. Stevens has not rated Snowflake.
