Darktrace’s share price is rising. Should I buy the stock now?

Shares in cybersecurity company Darktrace are having a great run at the moment. Edward Sheldon looks at whether he should buy the stock.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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.

Shares in cybersecurity company Darktrace (LSE: DARK) are having a great run at the moment. Since the firm’s Initial Public Offering (IPO) in late April, the DARK share price has shot up from 250p (the IPO price) to 650p.

I’ve said before that Darktrace – which uses artificial intelligence technology to protect customers from advanced threats including ransomware and SaaS attacks – looks like an interesting company. Is it time to bite the bullet and buy shares? Let’s take a look.

Darktrace is generating strong growth

Darktrace certainly appears to have a lot of momentum right now. In a trading update posted on Thursday (its first since the IPO), the group said it expects to post revenue of $278m for the year ended 30 June, reflecting year-on-year growth of at least 40%. It added that it ended the financial year with approximately 5,600 customers, an increase of 42% year-on-year.

Demand for our Self-Learning AI solutions is robust, as advanced cyber-attacks continue to outpace the human capability of security teams,” said Darktrace CEO Poppy Gustafsson.

Looking ahead, the company expects to keep generating strong growth. For FY2022, it now expects year-on-year revenue growth of between 29% and 32% (up from previous guidance of 27% to 30%). However, it noted there will be normal quarterly seasonality patterns, including soft first-quarter sales.

Overall, the trading update was very encouraging, in my view.

Two risks to consider

I do have a couple of concerns about Darktrace shares however. One is in relation to profitability. For the financial year just passed, analysts expect Darktrace to generate a net loss of $5.5m. For FY2022, they expect that loss to balloon to $23.4m.

A lack of profitability isn’t unusual for an early-stage, high-growth technology firm. And I don’t see it as a deal breaker. However, it does add risk to the investment case. For starters, it makes the company harder to value. Secondly, the share prices of unprofitable companies tend to be more volatile. We saw this earlier in 2021 during the tech stock sell-off.

Another concern is the stock’s valuation, which is lofty at present. At its current share price, Darktrace has a market-cap of £4.5bn. Let’s say revenue for FY2022 is $361.4m (assuming 30% growth). That puts the stock on a forward-looking price-to-sales ratio of 17.2. I wouldn’t say that valuation is outrageous, but it’s certainly high. Plenty of stocks with similar valuations were crushed in the tech sell-off earlier this year.

It’s worth noting that most analyst price targets are below the current share price. For example, Piper Sandler has a price target of 600p, while Berenberg’s is 525p.

Should I buy Darktrace shares now?

Given the high valuation here, I’m going to keep Darktrace shares on my watchlist for now. The company’s growth is certainly impressive. However, at present, I’m not convinced the stock’s risk/reward profile is favourable.

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.

Edward Sheldon 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

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

If I’d invested £5,000 in a Nasdaq index fund 5 years ago, here’s how much I’d have now

The Nasdaq index keeps hitting new all-time records in 2024, as US tech stocks fly. How much could I have…

Read more »

A senior group of friends enjoying rowing on the River Derwent
Investing Articles

£500 to invest a month? Consider aiming to turn that into a £20,000 passive income like this!

With a regular monthly investment, it's possible to build a large and steady passive income for retirement. Royston Wild explains.

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Investing Articles

As retirement needs soar 60%, here’s how I’m building wealth with UK shares

A regular investment in UK shares and funds could help Brits create a large and lasting pension. Our writer Royston…

Read more »

Investing Articles

I’d buy Games Workshop shares before they reach the FTSE 100!

Games Workshop shares look likely to join the FTSE 100 soon. Here’s why I think investors should consider buying the…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Could me buying this stock with a $2.5bn market-cap be like investing in Tesla in 2010?

Archer Aviation (NASDAQ:ACHR) stock's nearly doubled so far in November. Could this start-up be another Tesla in the making?

Read more »

Investing Articles

5,000 shares of this UK dividend stock could net me £1,700 a month in passive income

Our writer calculates the passive income he could earn from holding a significant number of shares in this powerful dividend-paying…

Read more »

Investing Articles

9.3%+ yields! 3 FTSE 100 dividend giants to consider buying

Our writer examines a trio of high-yield FTSE 100 shares and explains some of the opportunities and risks he sees…

Read more »

Investing Articles

As the Kingfisher share price drops on Budget fallout, should I buy?

The Kingfisher share price was on a strong 2024 run until the DIY group warned us of the possible effects…

Read more »