The Darktrace (LSE: DARK) share price has had a bit of a turbulent time after its initial public offering (IPO). Since April, the price rocketed up from 250p to a sky-high 1,000p, but has since fallen back down to earth. At time of writing, the share price is just over 500p.
The expected return for Darktrace’s shares is a huge 81% right now though. This calculates how far the share price is from analysts’ target price.
Is now the time for me to buy Darktrace shares?
Darktrace’s business
Darktrace operates in an exciting sector, in my view. It provides artificial intelligence-based technology to combat cybersecurity. On its website, it claims it’s able to interrupt cyber-attacks in seconds while they’re still in progress. Cyber crime is going to become more prevalent in an ever-more-digital world, not to mention the prospect of an expanding metaverse. Darktrace should be able to capitalise on this growing sector.
But why has the share price underperformed lately?
Darktrace share price underperformance
There was probably a lot of enthusiasm over Darktrace after the IPO given the sector its operating in. This meant the share price ran up too quick, and too far, after listing. Even so, the share price is still up a huge 100% since the IPO as I write.
The current consensus analyst target share price is 886p. As I mentioned at the start, that’s a huge 81% above the current price. This says to me that there could be an opportunity here, as that’s a considerable expected return.
The company’s performance remains strong. In the October trading update, Darktrace updated its annual revenue growth guidance to between 37% and 39% (up from 35%-37%). The CFO said customer numbers continue to grow, and annualised recurring revenue is rising too. There was nothing in the trading update that caused me much concern.
Share price valuation
As with most growth stocks, valuations can get stretched. I think this was an additional factor in the recent Darktrace share price fall.
For a start, the company is loss-making at the operating level. And even though revenue is expected to grow around 38% this year, the company is set to make a net loss of £24m. It makes valuing the shares on a price-to-earnings basis meaningless, and adds risk to a potential investment.
On a forward price-to-sales ratio, though, Darktrace’s share price is valued on a ratio of 9. This is punchy, but not extreme, in my view. This is because the business achieves high gross margins (last year was an impressive 90%). So if revenue growth continues, the company should become highly profitable if it keeps its operating costs low.
Final thoughts
I like the business here, and its sector. I view cybersecurity as a growing need in today’s digital world, so this could be a good investment for my portfolio. Analysts seem to think there’s considerable upside in Darktrace’s share price too. I’m placing it high on my watchlist.
