The Darktrace (LSE: DARK) share price has been volatile since its initial public offering in April last year. The shares listed at 250p, rocketed up to 1,000p in September, and have fallen back to 373p as I write today.
However, City analysts have a consensus target price of 797p for Darktrace stock. That would be a 111% return, or a more than double my initial investment if I bought the shares today. Analysts aren’t always right, though. So, it’s important for me to form my own view before I buy any shares. Let’s take a closer look at the company.
The investment case
Darktrace operates in the cybersecurity industry. It’s area that I think will be in increasing demand as the world becomes more digital. This should, in theory, benefit Darktrace in the years ahead. Indeed, according to Fortune Business Insights, the cybersecurity market is expected to grow from $166bn in 2021 to $366bn in 2028.
On its website, Darktrace says it’s a world leader in autonomous artificial intelligence (AI) for cybersecurity. The signs look promising, too. For example, there are currently 6,531 customers using its cybersecurity products according to the recent trading update for the six months to 31 December (HY22). Customer numbers actually increased by 39.6% over the same period in 2020. Furthermore, Darktrace says its AI solutions are able to interrupt cyber attacks in seconds.
The recent trading update also showed strong growth in the business. Revenue increased 50% in the first six months of HY22. Guidance was also raised for its full-year revenue expectations to 30 June, and margins should increase, too. I can see why City analysts are expecting the share price to more than double if this growth continues.
Should I buy at this Darktrace share price?
However, Darktrace is still loss-making, which does make the investment riskier. The company isn’t expected to turn a profit for at least the next three years either. Based on a forward price-to-sales ratio though, the shares are valued on a multiple of seven. I consider this quite high. But if revenue continues to grow by double-digits, and the company maintains a 90% gross margin, then it isn’t unreasonable, in my view.
My biggest issue today, though, is with the product. In fact, some customers have likened Darktrace’s products to “snake oil” due to the disconnect between the marketing of what its AI-driven solutions offer, and what it actually provides. This does make me question whether Darktrace’s AI is as good as it says it is. And although the recent trading was positive, it could be down to excellent marketing, rather than a world-leading cybersecurity product.
On this last point, Darktrace did say that churn had significantly improved over the half-year to 31 December. This does suggest that customers are sticking around and finding value in its products.
Nevertheless, there are too many risks on the product side for me to invest today, even though analysts expect the share price to double. Therefore, I think there’ll be considerable share price volatility ahead. Until Darktrace addresses the concerns over its product offering, I won’t be investing.
