The Darktrace (LSE: DARK) share price has performed strongly this year, rising 37%. But as I write on 6 September, it was trading 5% lower at 350p following the release of the cybersecurity firm’s FY 2023 earnings.
Does this dip represent a timely opportunity to invest in the FTSE 250 tech stock? Let’s take a closer look.
Strong growth in FY 2023
In the 12 months up to the end of June, the Cambridge-based business grew its customer base by 18.3%. Its number of customers reached 8,799, up from 7,437 at the end of June last year.
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That’s a deceleration in its customer acquisition rate, which management attributed to the “challenging macro-economic environment“. That’s understandable, I feel, as more firms are going bankrupt, so there are fewer around to sell cybersecurity solutions to.
That said, new customers helped propel revenue to $545m, good for 31.3% year-on-year growth. As for the bottom line, the firm delivered an impressive 52% rise in adjusted EBITDA ($139m), while net profit rocketed to $59m from $1.5m a year ago. The firm generated free cash flow of $93.8m, amounting to 67% of that adjusted EBITDA figure.
This improvement in core earnings is very encouraging, as is its contracted revenue backlog. This expanded to over $1.2bn after it acquired new contracts and expanded existing ones.
Looking forward, management affirmed its revenue growth guidance of between 22% and 23.5% for this year. However, in what it described as a “tale of two halves”, the company expects 45% of its net annual recurring revenue (ARR) to be recorded in H1 and 55% to be in H2.
Reduced earnings outlook for FY 2024
Despite this promising progress, there were a couple of things that seemed to spook some investors.
First, the company said it’s now going to pay 100% of its sales commissions up front, rather than in two instalments. This accounting change will squeeze its earnings margin in the current year (FY 2024), resulting in an adjusted EBITDA range of 17% to 19%. That’s down from its previous expectation of around 22%.
Obviously, this transition to a new commission payout timeline will also negatively impact this year’s free cash flow. For me, this is just a timing difference, so doesn’t seem too much of a big deal long term.
A little more worrying, though, is that the firm is planning to increase its revolving credit facility to give it more flexibility for “opportunistic” acquisitions. While having the potential to fuel further growth, acquisitions can be risky, especially when financed predominantly with debt.
Is the stock a possible buy?
Darktrace is certainly operating in a high-growth industry. According to a report published by Next Move Strategy Consulting, the global cybersecurity market is projected to generate $657bn in revenue in 2030, up from $197bn in 2021.
However, the stock’s valuation seems to reflect this growth potential, with a price-to-sales (P/S) ratio of 6.5. That leaves little margin of safety for investors, I feel, especially as the company’s growth appears to be moderating.
Personally, I’m rooting for Darktrace because the UK stock market needs more tech company success stories. However, I’ll be doing so from the sidelines, as I think there are safer growth stocks around today.
