Should I buy Darktrace shares for my portfolio?

Last week, British cybersecurity company Darktrace listed on the London Stock Exchange. Here, Edward Sheldon looks at whether he should buy its shares.

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Last week, British cybersecurity company Darktrace (LSE: DARK) listed on the London Stock Exchange via an Initial Public Offering (IPO). It’s fair to say it was a success. Since listing, the company’s share price has risen from the IPO price of 250p to 340p – a gain of 36%.

Is Darktrace a growth stock I should buy for my own portfolio? Let’s take a look at the investment case.

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The business

Darktrace is a cybersecurity company that uses artificial intelligence (AI) to detect sophisticated cyber-threats. Founded in 2013, it serves nearly 5,000 organisations in over 100 countries. Its clients include Prudential, Siemens, Vodafone, and KPMG.

Darktrace’s key product is its ‘Immune System’, which it says is the world’s leading autonomous cyber defence platform. This platform leverages self-learning AI technology to detect, investigate, and respond to cyber threats in real time.

At its current share price, Darktrace has a market capitalisation of about £2.2bn.

Darktrace: the bull case

There are several things I like about Darktrace shares. One is that the company operates in a high-growth industry. According to Cybersecurity Ventures, global cybercrime costs are set to grow by 15% per year, reaching $10.5trn annually by 2025, up from $3trn in 2015. So, we can expect to see spending on cybersecurity solutions, like those offered by Darktrace, boom in the years ahead. This should provide the company with tailwinds.

Another thing I like about the company is it’s generating strong revenue growth. Last year, revenue came in at $199m (the company reports in US dollars). That’s up from $79m in 2018.

The bear case

I do have some concerns in relation to Darktrace shares however. One is the company isn’t yet profitable. Last year, the group generated a net loss of $29m. This adds risk to the investment case. The stocks of non-profitable companies can be very volatile at times.

Another concern is the valuation. Currently, Darktrace sports a trailing price-to-sales ratio of about 15. That’s not outrageous. However, it’s also not cheap. If growth slows or the company experiences setbacks, the stock could take a hit.

Finally, it’s worth mentioning that investing in cybersecurity stocks can be tricky. That’s because the industry is extremely dynamic and tends to shift course as threats evolve. In other areas of technology, companies can take charge of their destiny by incrementally improving their products or services. However, in this industry, it’s the threats themselves that tend to dictate the roadmap. Constructing a sustainable competitive advantage can be challenging, even for the most agile cybersecurity businesses.

DARK shares: my move now

Weighing everything up, I’m going to keep Darktrace shares on my watchlist for now. The company certainly looks interesting. However, I’m not convinced the risk/reward proposition is favourable right now.

All things considered, I think there are better growth stocks I could buy.

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Edward Sheldon owns shares in London Stock Exchange and Prudential. The Motley Fool UK has recommended Prudential. 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.

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