Investors are buying Darktrace shares. Should I?

Rupert Hargreaves takes a closer look at Darktrace shares to see if he should buy them, considering the firm’s growth outlook.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Since the company’s IPO in the first quarter of this year, investors have been buying Darktrace (LSE: DARK) shares. Indeed, the stock is up nearly 100% from its market debut price. That’s an incredible performance for a business many people hadn’t even heard of a year ago. 

Over the past few weeks, I’ve been paying close attention to the business. I believe it has tremendous potential in a world where cybersecurity is becoming a severe issue. 

The outlook for Darktrace shares

According to analysts, the global cybersecurity market is expected to grow at a compound annual growth rate of nearly 11% between 2021 and 2028. It could be worth a combined $372bn by 2028, based on these projections

I think this is a conservative estimate. Global losses from cybercrime skyrocketed to nearly $1trn in 2020, and this figure’s only likely to grow.

As the cost of cyber attacks grows, companies and individuals will increasingly be willing to spend more to defend against these attacks. They may even be asked to spend more by their insurance providers. These organisations are buckling under the enormous cost of this threat. 

Of course, my projections may turn out to be incorrect. But one thing’s clear, this is a growing industry and it’s unlikely spending on defences will go into reverse. 

This is one of the reasons why I’m so interested in Darktrace shares. The tailwinds outlined above should drive sales and earnings growth at the group for the next decade if its product continues to protect customers.

But there’s always going to be a risk hackers will crack its software. Such a development could decimate the company’s reputation. 

Still, assuming the group avoids this worst-case scenario, I think the stock has tremendous potential. 

Undervalued equity 

As I’ve mentioned previously, Darktrace shares look cheap compared to its US peers (its valuation is around half that of Cloudflare). This number suggests the stock could double in value, although that’s far from guaranteed. 

Nevertheless, I think the valuation discrepancy shows the potential here. Even if the market doesn’t revalue the enterprise to a higher multiple, Darktrace still has plenty of room to grow.

It only has a tiny share of the global cybersecurity market, with potential revenues of $376m for 2022. If its valuation remains constant and revenues continue to grow, the stock is likely to push higher. 

With this being the case, even after taking the above risks into account, I’d follow the rest of the market and buy Darktrace shares.

As long as the company continues to invest in its software, it should keep competitors and attackers at bay. As the cybersecurity market expands, the rising tide may lift all boats. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »