June 23, 2021

Breakingviews: Dan Loeb cybersecurity IPO has winds at its back

by Breakingviews.

Third Point, Dan Loeb’s hedge fund, first invested in SentinelOne when the cybersecurity firm was worth $73 million. But instead of cashing out in its upcoming initial public offering at a possible market capitalization of $7 billion, the fund is buying more. That bet will pay off as long as winds blowing at the company’s back continue for a few more years.

SentinelOne detects and manages threats that can occur when devices like PCs and smartphones connect to networks. Revenue in the year to January doubled to $93 million, taking the firm’s valuation for a ride. A funding round in 2019 valued it at about $500 million, according to TechCrunch. In November, it was valued at roughly $3 billion. Now its IPO underwriters have more than doubled that figure.

Growth probably won’t slow soon. The number of internet-connected devices, often with poor security, is rocketing. Researcher International Data Corporation predicts there will be 56 billion connected devices by 2025. More vulnerabilities mean more opportunities for SentinelOne.

While the number of publicly reported security breaches in 2020 was down by 48%, according to a report by Risk Based Security, a research service, they involved more confidential records: over 37 billion, a 141% increase on 2019. Attacks appear to be taking longer to resolve. That’s a selling point for SentinelOne, which monitors network activity over time.

The company is also stealing market share. It thinks its addressable market is $40 billion a year by 2024 and growing about 12% per annum. SentinelOne’s top line is expanding much faster.

At the top of the proposed IPO valuation range, SentinelOne’s enterprise value would be about $6 billion. If it can double revenue again this fiscal year, that would clock in at something over 30 times estimated sales, according to Refinitiv data, or about the same as larger rival CrowdStrike, with forecast 56% revenue growth over the same period.

A few more years of growth outpacing the market would make SentinelOne’s IPO valuation look even more comfortable. Loeb has the advantage of a low average entry price. Investors coming fresh to the float will have to hope the momentum continues.

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BREAKINGVIEWS

Reuters Breakingviews is the world’s leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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