Re-Evaluating SentinelOne's Intrinsic Value: An In-Depth Analysis
Simply Wall St | August 11, 2024
Key Takeaways
Understanding the Intrinsic Value
Investors and analysts often seek to understand the true worth of a company beyond its market price. For SentinelOne, Inc. (NYSE:S), the question arises: how accurately does the current stock price reflect its intrinsic value? To answer this, we can apply a Discounted Cash Flow (DCF) analysis, a method that estimates the value of a company by forecasting its future cash flows and discounting them back to their present value.
While the DCF is just one of many valuation models, it offers a clear and structured approach to understanding how future earnings and growth rates translate into present-day value.
The DCF Model in Action
The two-stage DCF model employed here assumes two phases of growth: an initial period of higher growth followed by a more stable, long-term growth phase. This model helps capture the dynamic nature of a company like SentinelOne, which is currently in a rapid expansion phase but will eventually stabilize as it matures.
Step 1: Estimating Future Cash Flows
For the next ten years, we estimate SentinelOne’s free cash flows (FCF) based on analyst projections and logical extrapolations where data is missing. For companies with shrinking cash flows, we anticipate a deceleration in this shrinkage over time. Conversely, for companies with growing cash flows, we expect growth rates to taper off.
Here’s a simplified overview of the estimated FCFs for SentinelOne over the next decade:
- **2025**: US$28.3 million
- **2026**: US$91.3 million
- **2027**: US$158.4 million
- **2028**: US$222.7 million
- **2029**: US$353.4 million
- **2030**: US$457.9 million
- **2031**: US$556.2 million
- **2032**: US$643.9 million
- **2033**: US$719.9 million
- **2034**: US$784.7 million
These figures are discounted back to their present value using a discount rate of 6.6%, giving us a **Present Value of 10-year Cash Flow (PVCF)** of approximately US$2.5 billion.
Step 2: Calculating the Terminal Value
The terminal value accounts for all cash flows beyond the initial ten-year period. This is calculated using the **Gordon Growth Model**, which assumes a perpetual growth rate of 2.5%, reflective of the average 10-year government bond yield. Discounting the terminal value at the same rate (6.6%), we arrive at a **Present Value of Terminal Value (PVTV)** of around US$10 billion.
Step 3: Summing Up
Adding the PVCF and PVTV gives us a total equity value of US$13 billion. Dividing this by the total number of shares outstanding results in a fair value of US$41.22 per share, significantly higher than the current trading price.
Key Assumptions and Considerations
The accuracy of any DCF model heavily depends on the assumptions made. The most crucial variables include:
1. **Discount Rate**: The cost of equity used in this calculation is 6.6%, derived from a levered beta of 0.995. This measure reflects the stock’s volatility relative to the broader market.
2. **Cash Flow Estimates**: Analyst projections provide the basis for FCF estimates, but they’re supplemented by extrapolations where necessary.
3. **Terminal Growth Rate**: A conservative 2.5% perpetual growth rate is assumed, aligning with long-term economic growth expectations.
SWOT Analysis of SentinelOne
Strengths:
- **Debt-Free**: SentinelOne operates without the burden of debt, giving it financial flexibility.
Weaknesses:
- **Shareholder Dilution**: There has been dilution of shareholder value over the past year.
Opportunities:
- **Improving Financials**: The company is forecasted to reduce its losses in the upcoming year.
- **Strong Cash Position**: With enough cash to sustain operations for over three years, SentinelOne is in a solid financial position.
Threats:
- **Profitability Concerns**: SentinelOne is not expected to become profitable within the next three years.
Looking Forward
While the DCF model provides valuable insights, it’s important to consider that it represents just one perspective on a company's valuation. Investors should also account for factors such as market conditions, industry trends, and the company's strategic initiatives. The true value of SentinelOne, like any stock, is ultimately determined by the market, influenced by both quantitative analysis and qualitative factors.
For a well-rounded investment thesis, it’s advisable to explore other metrics and analyses alongside the DCF. Consider SentinelOne's competitive positioning, potential risks, and the broader market outlook before making any investment decisions.
Further Research
- Risks: SentinelOne has identified three key risks that potential investors should be aware of.
- Future Earnings: Compare SentinelOne’s growth projections with those of its peers and the market.
- Alternative Investments: Explore a list of other high-quality stocks to see how SentinelOne measures up.
Note: This analysis is intended for informational purposes and does not constitute financial advice. Always conduct your own research or consult with a professional before making investment decisions.
Simply Wall St | August 11, 2024
Key Takeaways
- Estimated Fair Value: SentinelOne's fair value is projected at US$41.22 per share, based on a two-stage Free Cash Flow to Equity model.
- Current Undervaluation: The current market price of US$21.79 indicates that the stock may be undervalued by approximately 47%.
- Comparison to Analyst Targets: This fair value estimate is notably 66% higher than the average analyst price target of US$24.88.
Understanding the Intrinsic Value
Investors and analysts often seek to understand the true worth of a company beyond its market price. For SentinelOne, Inc. (NYSE:S), the question arises: how accurately does the current stock price reflect its intrinsic value? To answer this, we can apply a Discounted Cash Flow (DCF) analysis, a method that estimates the value of a company by forecasting its future cash flows and discounting them back to their present value.
While the DCF is just one of many valuation models, it offers a clear and structured approach to understanding how future earnings and growth rates translate into present-day value.
The DCF Model in Action
The two-stage DCF model employed here assumes two phases of growth: an initial period of higher growth followed by a more stable, long-term growth phase. This model helps capture the dynamic nature of a company like SentinelOne, which is currently in a rapid expansion phase but will eventually stabilize as it matures.
Step 1: Estimating Future Cash Flows
For the next ten years, we estimate SentinelOne’s free cash flows (FCF) based on analyst projections and logical extrapolations where data is missing. For companies with shrinking cash flows, we anticipate a deceleration in this shrinkage over time. Conversely, for companies with growing cash flows, we expect growth rates to taper off.
Here’s a simplified overview of the estimated FCFs for SentinelOne over the next decade:
- **2025**: US$28.3 million
- **2026**: US$91.3 million
- **2027**: US$158.4 million
- **2028**: US$222.7 million
- **2029**: US$353.4 million
- **2030**: US$457.9 million
- **2031**: US$556.2 million
- **2032**: US$643.9 million
- **2033**: US$719.9 million
- **2034**: US$784.7 million
These figures are discounted back to their present value using a discount rate of 6.6%, giving us a **Present Value of 10-year Cash Flow (PVCF)** of approximately US$2.5 billion.
Step 2: Calculating the Terminal Value
The terminal value accounts for all cash flows beyond the initial ten-year period. This is calculated using the **Gordon Growth Model**, which assumes a perpetual growth rate of 2.5%, reflective of the average 10-year government bond yield. Discounting the terminal value at the same rate (6.6%), we arrive at a **Present Value of Terminal Value (PVTV)** of around US$10 billion.
Step 3: Summing Up
Adding the PVCF and PVTV gives us a total equity value of US$13 billion. Dividing this by the total number of shares outstanding results in a fair value of US$41.22 per share, significantly higher than the current trading price.
Key Assumptions and Considerations
The accuracy of any DCF model heavily depends on the assumptions made. The most crucial variables include:
1. **Discount Rate**: The cost of equity used in this calculation is 6.6%, derived from a levered beta of 0.995. This measure reflects the stock’s volatility relative to the broader market.
2. **Cash Flow Estimates**: Analyst projections provide the basis for FCF estimates, but they’re supplemented by extrapolations where necessary.
3. **Terminal Growth Rate**: A conservative 2.5% perpetual growth rate is assumed, aligning with long-term economic growth expectations.
SWOT Analysis of SentinelOne
Strengths:
- **Debt-Free**: SentinelOne operates without the burden of debt, giving it financial flexibility.
Weaknesses:
- **Shareholder Dilution**: There has been dilution of shareholder value over the past year.
Opportunities:
- **Improving Financials**: The company is forecasted to reduce its losses in the upcoming year.
- **Strong Cash Position**: With enough cash to sustain operations for over three years, SentinelOne is in a solid financial position.
Threats:
- **Profitability Concerns**: SentinelOne is not expected to become profitable within the next three years.
Looking Forward
While the DCF model provides valuable insights, it’s important to consider that it represents just one perspective on a company's valuation. Investors should also account for factors such as market conditions, industry trends, and the company's strategic initiatives. The true value of SentinelOne, like any stock, is ultimately determined by the market, influenced by both quantitative analysis and qualitative factors.
For a well-rounded investment thesis, it’s advisable to explore other metrics and analyses alongside the DCF. Consider SentinelOne's competitive positioning, potential risks, and the broader market outlook before making any investment decisions.
Further Research
- Risks: SentinelOne has identified three key risks that potential investors should be aware of.
- Future Earnings: Compare SentinelOne’s growth projections with those of its peers and the market.
- Alternative Investments: Explore a list of other high-quality stocks to see how SentinelOne measures up.
Note: This analysis is intended for informational purposes and does not constitute financial advice. Always conduct your own research or consult with a professional before making investment decisions.