The Darktrace share price has surged, but is the stock worth its valuation?

The Darktrace share price looks cheap compared to peers, but this Fool is staying away from the stock due to competition concerns.

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The Darktrace (LSE: DARK) share price has become one of the most sought-after IPOs on the London market this year.

The Cambridge-based cybersecurity company priced its initial public offering at 250p a share, giving it an opening value of £1.7bn. Since then, the stock has surged. The shares are currently changing hands for just under 350p, giving the company a market capitalisation of £2.5bn. 

I’ll admit I’m incredibly impressed by the company’s technology and prospects. As such, I’ve been eyeing up the stock recently with the view to adding it to my portfolio. However, after its recent performance, the Darktrace share price appears expensive. 

Growth vs value

Trying to determine how much the company is worth is a bit challenging. Its revenues grew 45% in its most recent fiscal year to almost $200m, which is incredibly impressive. But, unfortunately, the firm remains loss-making. 

That makes it difficult for me to evaluate the business based on profitability or cash flows. 

At current exchange rates, $200m is around £141m. This implies the stock is trading at a price-to-sales (P/S) multiple of approximately 17.7. Compared to the company’s larger US peers, this doesn’t look particularly demanding. 

For example, Okta, which offers a suite of products to manage and secure identities for computer system users, is trading at a P/S ratio of 36.

Meanwhile, CrowdStrike, one of the world’s largest publicly-traded cybersecurity companies, with a market capitalisation of around $47bn, is currently trading at a P/S ratio of 53. The business is also loss-making, but it appears to be growing faster than its London-listed peer. Revenues grew around 81% last year. 

These figures suggest the Darktrace share price isn’t particularly expensive, compared to its international peers. In fact, the numbers indicate that if the enterprise keeps growing at its present rate, the stock could support a valuation twice as high as its current multiple.

Of course, there’s no guarantee the company will ever reach this level of valuation.

Darktrace share price risks

The cybersecurity business has reported explosive growth over the past few years. Its unique technology, coupled with the overall growth of the cybersecurity industry in general, has helped the company print these impressive numbers. 

However, it’s not the only organisation in the sector. Competition is fierce and growing daily. There are always new technology companies with new products, and the technology is changing all the time. Darktrace needs to keep up with, or preferably ahead, of the competition.

I think that’s the most considerable risk facing the Darktrace share price. The company is still a relatively small enterprise. If it doesn’t keep investing to rival the big players, growth could slow. In this scenario, it’s unclear whether or not the market would continue to reward the stock with a high valuation. 

Even after considering these risks, I’m still optimistic about the outlook for the Darktrace share price. As such, I’d buy the stock for my portfolio.

Over the next few years, I reckon the group can capitalise on the booming cybersecurity market, which should drive revenue and profit growth. And, as profits grow, the market may reward the company with a higher valuation. 

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.

Rupert Hargreaves 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.

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