Darktrace (LSE: DARK) shares have been on an eventful round trip since the cybersecurity ‘unicorn‘ listed in April 2021.
After flying out of the traps and surging 200% in just a few months, the stock then lost over 60% of its value in half a year. Today, the share price is roughly back where it started after the firm’s IPO.
Recently, the stock has been surging. Indeed, it’s up 30% in 2023. That means if I’d invested £5,000 in Darktrace shares at the start of the year, I’d now have £6,500 (excluding trading costs).
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Business update
Darktrace is certainly an interesting company. Founded in 2013, its platform uses machine learning and AI algorithms to neutralise cyber threats across cloud networks, the internet of things (IoT) and industrial control systems.
The Cambridge-based firm currently has 8,403 customers in more than 110 countries. In Q3 (ending 31 March), the company reported revenue of $139m, reflecting year-on-year growth of 28%. Plus, its annual recurring revenue (ARR) is now estimated to be 34% higher at $583m.
This ARR is subscription-based and multi-year in structure. That said, for the nine-months to 31 March, net ARR added was $98.7m, representing a mere 3.2% rise.
The company noted that “continuing uncertainty in the macro-economic environment is still having a significant impact on new customer additions and related ARR growth.”
Even so, management still expects full-year revenue growth of around 31%, which is at the high end of its previous range. And the EBITDA margin should also be at the upper end of its guidance, at about 19%.
Meanwhile, the stock is trading on a price-to-sales (P/S) multiple of 6.5. While certainly not cheap, that doesn’t seem too outrageous, assuming the company can keep attracting new customers.
Arms race
According to BlackBerry, the global cybersecurity market will grow from $173bn last year to $266bn by 2027.
That’s not surprising, considering there’s hardly a week goes by without another major hacking incident. Recently, for instance, several US federal government agencies were hit in a global hacking spree by cybercriminals.
So cyber threats will almost certainly continue, and they’ll evolve and mutate, as will the tools that defend against them. It’s like a never-ending arms race, which I think poses difficulties for investors.
Which companies will be the long-term winners in this constantly changing industry? I personally find it very difficult to tell as things stand.
Knowing my own boundaries
Here, I’m reminded of Warren Buffett’s famous advice to investors: “Know your circle of competence, and stick within it. The size of that circle is not very important; knowing its boundaries, however, is vital.“
Having said that, I do want my portfolio to be invested in an industry that’s tipped for years of exceptionally strong growth. So I’ve opted to invest in the L&G Cyber Security ETF instead.
It’s not risk-free, of course, but this ETF gives me broad exposure to the overall industry without the added risk of picking individual stocks. Indeed, it currently has Darktrace as a top 10 position, so I’m happy holding that.
But for investors with a higher risk tolerance, I think Darktrace shares could still be worth a look.
