Would Darktrace (LSE:DARK) shares have represented a good investment if I had bought a year ago? It’s a short answer. No, certainly not.
The stock is down 37.5% over 12 months. So if I had made a £100 investment a year ago, today I’d have just £62.50. And as there’s no dividend, that’s a pretty poor investment.
But past performance isn’t indicative of future performance. So, is Darktrace a buy now?
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Performance dips
Darktrace disappointed investors in March when it reported a slump in first-half operating profits, and cut its free cash flow guidance as new customer additions slowed. It was also impacted by a jump in employer tax charges.
Operating profit for the six months to the end of December 2022 came in at $577,000, down 91.6%. This was primarily due to “elevated share-based payment and associated employer tax charges related to vesting of a significant block of grants made at IPO“, the company said.
However, in April, the cybersecurity firm delivered a “robust” Q3 report. Darktrace reported annual recurring revenues (ARR) of $583.6m as at 31 March, up 33.7% year on year. For 2023, the company expects year-on-year growth in constant currency ARR to be at or around 29%.
What’s next?
As the company alluded to, the macroeconomic environment is not entirely supportive of its growth plans “as requirements to hold or cut spend have made prospects more reluctant to run product trials“.
Unfortunately, however, there was more bad news on Friday with the company’s former adviser Mike Lynch losing his US extradition appeal. Lynch is subject to accusations of fraud concerning the $11bn sale of software company Autonomy to Hewlett-Packard. The share price appeared to fall on the news.
On the plus side, there is one positive macroeconomic driver. The Cambridge-based firm, which uses AI technology designed to protect critical national infrastructure and global corporations from cyber-attacks, should see continued benefit from an increasingly tense geopolitical environment.
Darktrace’s management have also talked up the opportunities to upsell clients through the recent launch of its email upgrade. They’re optimistic about PREVENT’s ability to contribute to future growth, a recent press release highlighted.
Analysts are forecasting a net profit of $32.1m and earnings per share of 7.63c for the year ending 30 June.
Should I buy?
I’ve owned Darktrace before, and I had intended on holding it for the long run, but there was just so much volatility. I was fortunate as I was presented with an attractive opportunity to sell — a proposed buyout sent the share price soaring in late summer 2022.
I’ve previously looked at discounted cash flow calculations on Darktrace that suggest — at today’s price — the stock could be undervalued by as much as 55% — that’s using a discount rate of 8%. But when we’re looking 10 years into the future, cash flow forecasts are not always accurate.
I am considering investing again, especially as the stock is currently trading for around half where I sold in the summer. I’m broadly positive on the company’s long-term prospects, but there’s some near-term concerns, including the outcome of an EY review into Darktrace’s finances and reports of short selling.
