Darktrace (LSE: DARK) shares skyrocketed in 2021. But they quickly crashed back, causing big pain for those unlucky enough to get in near the top.
But after a shaky patch, they’ve been steadily climbing in 2023. Despite a recent dip, they’re up 36% since the start of the year. At the time of writing, £10k in Darktrace shares at the start of the year would have grown to £13.6k.
And that’s the kind of return that could compound into serious profits.
But it only takes a quick look at the big ups and downs in the share price chart to see where the risks lie.
Growth stock risk
It’s been a very volatile stock, and it’s anybody’s guess where it might go tomorrow, never mind next year.
Right now, we’re looking at a very high price-to-earnings (P/E) ratio, at over 70 for the current year. Forecasts show a drop in the next two years, but only to around 45 by 2026.
Without any feel for likely levels of long-term earnings, it’s hard to tell if that’s cheap, expensive, or what.
And I have one short-term worry here, which could upset any rational approach anyway.
Techie bandwagon
It’s the AI thing. It looks to me like it’s becoming as much a marketing buzz phrase these days as a real technical thing.
People have been doing learning-based software development for years, without necessarily calling it AI. But now, I’m seeing hints that any smart new software approach is cause for trotting out the AI talk.
Look what happened to penny stock RC365 recently. It soared and crashed based on some headline connection to something that’s apparently a bit to do with AI. I’ve no idea what it’s actually doing or what the outlook is like for that one.
Caution needed
But when investors are getting all excited by new techie buzzwords without actually understanding what they mean, I get nervous.
Darktrace is using AI-based learning methods in its defences against cyber-attacks, though it doesn’t seem to have been caught on any new AI bandwagon yet. But might folk latch on to that and pile in?
They might, and that could mean a good (though maybe short-term) result for shareholders.
Then we could have another boom and bust. And I don’t like seeing people being burned by those.
Buy what we understand
It brings up another concern too. I don’t understand Darktrace’s technology. I know what cybersecurity and AI are, in general terms. But I haven’t any real clue what the stuff is actually doing, at the sharp end.
But, I do like the way the company is progressing. Darktrace reported a 28% rise in Q1 revenue year on year this year. And it’s building up a solid base of annualised recurring revenue.
I’m torn between not properly understanding the technology or where the fuzzy AI boundaries lie, and having maybe enough generalised knowledge to think Darktrace could be on to a big thing.
I need to try and bend my brain round it some more.
