Baron Funds, an investment management company, released its “Baron Discovery Fund” second quarter 2024 investor letter. A copy of the letter can be downloaded here. In the second quarter, the fund (Institutional Shares) declined 7.78% underperforming the 2.92% return for the Russell 2000 Growth Index. The lion’s share of negative attribution and 6.52% of negative performance of the fund during the quarter were attributed to the ten worst-performing equities. The firm believes downward movements are more technically tied to macroeconomic issues and the trading environment and could quickly revert. In addition, please check the fund’s top five holdings to know its best picks in 2024.
Baron Discovery Fund highlighted stocks like Sentinelone Inc. (NYSE:S) in the second quarter 2024 investor letter. Founded in 2013, Sentinelone Inc. (NYSE:S) is a cybersecurity provider. The one-month return of Sentinelone Inc. (NYSE:S) was 11.72%, and its shares gained 52.63% of their value over the last 52 weeks. On August 23, 2024, Sentinelone Inc. (NYSE:S) stock closed at $25.26 per share with a market capitalization of $7.903 billion.
Baron Discovery Fund stated the following regarding Sentinelone Inc. (NYSE:S) in its Q2 2024 investor letter:
“We are huge believers in the practical uses of AI, and we have several investments in companies that adapt AI models to enhance their products and services. These include companies like GitLab Inc., Sentinelone Inc. (NYSE:S), and Couchbase, Inc., which were among our top detractors at one point in the second quarter (GitLab and SentinelOne recovered significantly in the last week of the quarter). As of the second quarter at least, the market has just not been ready to reward AI companies beyond those providing “picks and shovels.” This led to all three of these companies trading at or near all-time low valuation levels during the quarter. Nevertheless, we believe that in the coming quarters the market will broaden its level of interest from AI hardware to “adaptive AI” investments like GitLab, SentinelOne, and Couchbase. In that scenario, all three of these stocks have significant upside potential.
GitLab is a subscription software company that enables enterprise software developers to develop new software applications rapidly and securely for their firms. GitLab uses AI to help with code suggestions, to check for holes in security, and to automate collaboration among the many developers within an enterprise. GitLab recently launched a product called Duo that we believe will provide revenue upside for the company and enhance the competitiveness of their product of offerings. SentinelOne is a cybersecurity company that provides endpoint protection (a much more advanced version of legacy “anti-virus” software) both at customers’ physical sites and in the cloud. It uses AI to detect anomalous behavior on the network and to automate the remediation of the security flaws that led to the intrusion. Both companies are recurring revenue entities, with high gross margins (78% for SentinelOne and 90% for GitLab) and are growing rapidly (revenue growth of 25% or more). Yet both are trading at or near all-time low valuation levels. SentinelOne slightly beat full-year revenue guidance but guided to an operating loss that was $7.5 million worse than consensus (entirely accounted for by the increased operating expense pulled in from acquisitions – including PingSafe which allows SentinelOne to scan cloud-based workloads without the need to install a software agent). This led to a one-day stock drop of as much as 31% which we attribute purely to market skittishness. By quarter end, SentinelOne’s shares had fully recovered. We believe the company can grow revenues by 25% from 2024 through 2028 and that free cash flow will go up over 10-fold in this period. We see the stock at least doubling from its current price.”
A cybersecurity expert monitoring the security of the company’s assets, emphasizing the importance of data protection.
Sentinelone Inc. (NYSE:S) is not on our list of 31 Most Popular Stocks Among Hedge Funds. As per our database, 37 hedge fund portfolios held Sentinelone Inc. (NYSE:S) at the end of the second quarter which was 36 in the previous quarter. While we acknowledge the potential of Sentinelone Inc. (NYSE:S) as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as NVIDIA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
In another article, we discussed Sentinelone Inc. (NYSE:S) and shared the list of best up and coming stocks to buy according to hedge funds. Baron Discovery Fund’s Q4 2023 investor letter expressed optimism about Sentinelone Inc.’s (NYSE:S) potential for margin expansion and positive cash flow generation in the next fiscal year. In addition, please check out our hedge fund investor letters Q2 2024 page for more investor letters from hedge funds and other leading investors.
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Disclosure: None. This article is originally published at Insider Monkey.