Darktrace’s (LSE: DARK) share price has been on a wild ride in recent years. After coming to the market at an Initial Public Offering (IPO) price of 250p, the stock spiked up to 1,000p within months. However, since then, it has fallen back to near 250p.
So how should investors be looking at the growth stock now? Is the current share price a magnificent investment opportunity? Or is Darktrace a risky bet from here? Let’s discuss.
The path to profitability
Looking at Darktrace shares today, I can see reasons to be both bullish and bearish.
One reason to be optimistic here is that the company is expected to generate a decent profit this year. For the year ending 30 June, analysts expect the group to post a net profit of $32.1m and earnings per share of 7.63 cents.
Profits will make the company easier to value, and should help to eliminate the share price volatility.
Speaking of valuation, it doesn’t look crazy after the recent share price fall. Currently, the forward-looking price-to-earnings (P/E) ratio is around 40. Yet it falls to around 28 using next financial year’s earnings forecast.
That multiple actually seems quite reasonable to me, given the company’s growth rate (three-year sales growth of about 200%).
Of course, another reason to be optimistic is that the company operates in a booming industry. According to Allied Market Research, the global cybersecurity market is projected to be worth around $480bn by 2030 versus $200bn in 2020. So the group should have massive tailwinds in the years ahead.
Slower growth in the near term
On the downside, the company recently told investors it’s facing a challenging business environment right now.
“It remains clear that continuing uncertainty in the macro-economic environment is still having a significant impact on new customer additions and related annual recurring revenue (ARR) growth”, it said in its Q3 trading update.
As a result of the weak business environment, it expects ARR for the current financial year to be at the bottom end of its previous guidance (29-31.5%).
These challenging conditions pose a threat to the share price. If the company’s performance continues to deteriorate, the stock could underperform.
Another negative here is that the company was recently targeted by short sellers. Back in February, Darktrace was the subject of the report by New York-based firm Quintessential Capital Management (QCM). The research firm said that it was sceptical in relation to Darktrace’s financial statements.
Now, Darktrace has said that it has confidence in its financial statements, and it has hired EY to do an independent review of its finances. However, we are yet to hear anything from EY. So there is still some uncertainty here.
It’s worth pointing out that the stock still has a relatively high level of short interest, although the level is much lower than it was in early February.
My view
Putting this all together, it’s hard to know if the current share price is a great opportunity. There are definitely things to like here. But there are also some major risks.
Weighing up risk versus reward, I think the best move for now is to pass on the stock and look at other investment opportunities.
