In the past month, the Darktrace (LSE: DARK) share price has gained 15%. But against the rocky year it’s had, that’s probably just noise.
The shares climbed more sharply in August on news of a possible buyout offer, but quickly dropped back in September when that was terminated. What might it take for us to see some sustained share price rises?
Rising sales
All I think investors really have to go on now is sales progress. And, judging by the first quarter, things are moving in line with expectations.
Q1 revenue increased 37%, to $126.3m. Darktrace’s customer numbers grew by 29%, with net annual recurring revenue (ARR) up 13%.
This was enough for the board to reiterate its 2022/23 outlook, suggesting revenue growth of between 30% and 33%. But it noted that “FY 2023 revenues are likely to experience increasing drag from FX rate impacts“. So that’s a short-term risk to watch out for.
There’s always a risk with growth companies when the market is relying on revenue figures. If one quarter’s revenue should come in even slightly behind expectations, we often see investors selling and running.
The main risk I see, though, is in progress in turning revenue into sustainable profit growth. So far, at least, Darktrace’s gross margin appears to be holding up.
Profit and cash
Forecasts suggest a modest profit in the 2023/24 year, which makes it hard to put a valuation on Darktrace shares now.
But I think we’re at a point where even relatively small changes in profit outlook could make a significant difference. If it looks like the company could manage more than a token profit, I can see the share price getting a boost. Against that, of course, any shortfall could send the shares down.
On the cash front, Darktrace had $390m on the books at 30 June. And research and development (R&D) costs are relatively modest. Last year’s total R&D costs came to a shade over $44m.
I think improving cash flow in the next 12 months could have a strong positive effect on the shares price. The opposite, though, is also a possibility.
Settle down now
Above all, I think we need emotions and sentiment to settle down. The Darktrace share price went through a boom-and-bust cycle in 2021, attracting the attention of short sellers.
It looks like that’s been shaken out now. But I get the feeling that we’re still in that growth share phase where watchers are hanging on every possible word, be it news, rumour, or whatever.
We’re facing a recession too, which can be a bad time to invest in growth stocks. But I see that as mostly affecting those that might still need more cash, rather than an apparently well-funded company like Darktrace. I also see its business as being relatively defensive against economic conditions.
Would I buy?
So would I buy Darktrace shares today? I usually prefer a growth stock when it’s passed its early ups and downs and has settled into something more quantifiable. But, despite the clear risks, I might go for a small investment.
