The Darktrace share price jumped 20% today. Here’s why!

After the Darktrace share price leapt by a fifth in early trading, our writer explains why — and what it could mean for investors.

| More on:
Businesswoman analyses profitability of working company with digital virtual screen

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shareholders in cybersecurity company Darktrace (LSE: DARK) have had a tumultuous few years. Between a high point in 2021 and a low last year, the Darktrace share price tumbled by three quarters.

Today (26 April) though, the shares leapt 20% in early trading. Why?

A takeover bid. US investment firm Thoma Bravo announced it had reached agreement with Darktrace management on taking over the UK firm at a price equivalent to £6.20 per Darktrace share (at the current exchange rate).

Darktrace shares soon reached almost that level, suggesting that the City expects the cash deal to proceed.

Does this make sense for Darktrace shareholders?

Darktrace has been listed for under three years. In that time, its revenue growth has been impressive.

Source: TradingView

But at the earnings level, things have been less impressive, in my view. Tech firms often like somewhat obscure metrics to communicate their business performance. Indeed, I have often found Darktrace’s reports to be difficult to comprehend for that reason.

Just as revenue has improved markedly in recent years, so has EBITDA (earnings before interest, tax, depreciation and amortisation).

Source: TradingView

I tend not to pay too much attention to EBITDA though. Costs like interest and tax are real so why exclude them from the financial assessment of a company’s performance?

Instead, I would pay more attention to basic earnings per share. This measure has two attractions, in my view. First, it does not exclude real business expenses like interest. Secondly, looking per share instead of a total means the impact of any share dilution is more obvious.

Looking at basic earnings per share, again, the company has been making sizeable forward strides over the past several years.

Source: TradingView

Still, the company has a very limited track record of profitability. Based on its most recent full-year earnings per share, the Darktrace share price-to-earnings ratio is 46. That is far higher than I am comfortable with and is one reason I have not bought the shares at any point.

Where things go from here

Thoma Bravo clearly sees value however. No doubt that will lead other companies to run their slide rules over Darktrace and it may be that another bidder emerges, pushing the share price up further.

That is not guaranteed though. Nor is it certain that Thoma Bravo’s bid will succeed. Such situations always involve risks like regulatory clearance not being granted.

If that happens, the Darktrace share price could fall again.

Valuation always matters!

If the bid succeeds, some investors will do well out of it. Those who had bought at the start of this year, for example, would now be sitting on an 80% paper return.

But what about long-term investors that bought when the shares hit highs in 2021? They are now looking at a paper loss of 35%.

In a takeover situation, if the bid proceeds, shareholders typically have no choice but to accept. They have to take the loss even if they believe the share price would increase if the company could stay independent.

That is a salutary lesson to all investors about the importance of never overpaying for shares!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Middle-aged black male working at home desk
Investing Articles

2 top passive income shares to consider buying in May

Royston Wild thinks now's a great time to go shopping for UK passive income shares. Here are two of his…

Read more »

Middle-aged black male working at home desk
Investing Articles

Are FTSE 250 shares still a bargain?

Here’s a FTSE 250 stock I’m considering right now for my portfolio because of its value and growth credentials –…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

Why the Diageo share price looks like a once-in-a-decade passive income opportunity

The Diageo share price has fallen 14% as the FTSE 100 hits new highs. At its lowest price-to-sales ratio for…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

57 years of growth! Here’s one of my favourite dividend shares

Royston Wild is building a list of the best dividend shares to buy. Here's a dividend growth star he's hoping…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

Are Aviva shares in danger of a fresh price collapse?

Aviva shares have been on the march again in recent weeks. But is the FTSE 100 life insurer now at…

Read more »

Businesswoman calculating finances in an office
Investing Articles

This FTSE 100 share looks too cheap to ignore!

Selling for pennies and with a big dividend coming, this FTSE 100 share could be a value trap. Our writer…

Read more »

Young woman holding up three fingers
Investing Articles

I’d stuff my ISA with bargains by looking for these 3 things!

Our writer explains how he aims to find real long-term bargain buys for his ISA by considering a trio of…

Read more »

British Pennies on a Pound Note
Investing Articles

Up over 50% in 2024, could this penny share keep going?

This penny share has more than tripled in a couple of years. Our writer sees some reasons to like it…

Read more »