One of the most exciting companies in the UK right now is cybersecurity firm Darktrace (LSE: DARK) – and yet its shares are down 70% from all-time highs.
The thing is, cybersecurity looks set to be one of the biggest industries for growth in the coming years. It’s already almost doubled since 2016, increasing from $83bn to $147bn in 2022.
And one estimate I found predicts the sector to sustain a 17.2% compound annual growth rate in coming years.
With that kind of growth, now might be a great time to buy in before Darktrace stock surges. Should I snap up a few shares today?
Hitting ‘unicorn’ status
Darktrace produces a range of cybersecurity solutions. Basically, these are programs that protect organisations from security threats that come through the internet.
The company was founded in 2013 and reached the prized ‘unicorn’ status after it passed a $1bn valuation upon its IPO in 2021. Some further details:
- 8,100 customers in over 100 countries
- 2,200 employees globally
- HQ in Cambridge – spun out from Cambridge University
- Staffed by ex-MI5 and ex-GCHQ mathematicians
- Over 135 cybersecurity patent applications
As good as all this sounds, the real opportunity here is that Darktrace offers me one of the few ways I can get exposure to the cybersecurity sector.
Other firms are either not UK-based or the operations are part of a larger corporation (BAE Systems).
Profits in 2023
One roadblock here is that the company is so new that it only started making profit recently. That means it’s hard to evaluate its long-term prospects.
Still, revenues and earnings seem to be heading in the right direction:
- Total revenue of £79m in 2018 increased to £416m in 2022
- Annual recurring revenue as of Q3 2023 is up to £467.8m
- 2022 saw first year of profit with net income of £1.5m
- For 2023, analysts are forecasting net income of £25.7m
If Darktrace can sustain these increasing numbers, then the current share price looks far too cheap.
A cheap price?
Speaking of the price, Darktrace shares shot up after its April 2021 IPO. They reached a peak of £9.85 by September of the same year.
Since then, shares have fallen over 70% to today’s price of £2.83. That sounds like I could buy in at a steep discount, so what’s going on here?
Fraud charges
Well, Darktrace’s co-founder Mike Lynch has been extradited to the US. He’ll be in court to face fraud charges after selling his previous company Autonomy.
Hewlett-Packard bought Autonomy but later had to write down 90% of the purported $10bn assets it acquired.
If that’s a window into the culture of a Mike Lynch company, then I’m not surprised the Darktrace share price is treading water.
And a little research shows me that users are not impressed with the firm’s pushy sales practices and its software, which is more style over substance.
I think this kind of stuff catches up with a company over the long run, even if the financials look good on their own.
If I had £1,000
All in all, the risks here mean if I had a spare £1,000 to invest right now I would not put any into Darktrace shares. I’ll be looking for other opportunities to take advantage of the coming demand for cybersecurity solutions.
