The IPO of Darktrace (LSE:DARK) at the end of April brought with it a lot of excitement. It was hyped to be the next great British tech company, a world leader in cyber security. But with all the positive news, it also brought some concerns. Large shareholder Mike Lynch was (and still is) facing extradition to the US on fraud charges. That aside, now that we’re a few months past the initial trading period, what’s the situation regarding the Darktrace share price and should I buy the shares?
Darktrace shares shooting higher
I wrote a piece when the company had just listed. In it, I flagged up a few things that were a little concerning that made me want to stay away from investing in the short run. For example, the valuation was cut at the last minute by over a billion to £1.7bn. This meant the IPO price was set at 250p.
It surprised me at how much was cut off the valuation in order to take it public. Yes, tech firms can be very hard to value. This is because lot of the value comes from software and the future uses of it. At the same time, it didn’t fill me with confidence that the Darktrace share price was cut significantly before the listing.
If we fast forward to today, the shares are trading around 710p. This is a huge return in just a few months. So clearly, the initial concern about the valuation has been blown out of the water. Now that the company is public, more frequent trading updates allow me to get a better look under the hood at performance to see whether such a move higher is justified.
Earlier this month, we got a trading update for the full year ending June. It highlighted customer growth of 42% year-on-year, correlating to around a 40% increase in revenue. There was no mention of profitability though, and I’ll have to wait for the comprehensive report to come out to hear more.
Why I’m not convinced
I’m still very much on the fence regarding the Darktrace share price. I don’t feel that the situation of the company has materially changed from the IPO. So the large increase in share price (and valuation) seems out of whack to me. Even with the trading update being positive, it looks to me like it was loss-making during the latest financial year.
Added to this is the fact that last week, a British court rejected the attempt by Mike Lynch to block the extradition order from the US on those fraud charges. Lynch was one of the founding investors behind Darktrace. If these charges are indeed valid, it could cast a shadow over the firm.
I could be wrong with my pessimistic view, and Darktrace could continue to be an investor favourite as a UK tech darling. But from my angle, I can’t see enough of a compelling reason to buy with the shares trading above 700p.
