What’s going on with the Darktrace share price?

The Darktrace share price has been soaring since it made its London stock market debut. But should I buy after its trading update?

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The Darktrace (LSE: DARK) share price rose almost 4% yesterday after the cyber security firm released a brief trading update. In fact, since its London stock market float earlier this year, the shares have risen by over 80%.

Of course, past performance isn’t an indication of future returns. But it’s impressive for a company that has just come to market. As I mentioned, Darktrace released a short but sweet announcement, which I think is worth taking a look at.

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The update

Before I start analysing the trading update, it’s worth mentioning here that yesterday’s release was the first meaningful news since the company went public. So it’s inevitable that myself and other investors are going to be watching very closely.

In short, the announcement was encouraging. The company expects to end its 2021 financial year on a positive note. It has increased its customer base by 42% year-on-year and now has roughly 5,600 clients.

Darktrace also expects revenue for 2021 of at least $278m, which is year-on-year growth of at least 40%.  The company also included another metric called Annualised Recurring Revenue or ARR.

For a tech company, I’d be looking for high repeat income as this indicates stability in sales. As of the end of June, Darktrace expected an ARR of at least $340m. According to the firm, this represents year-on-year growth of 44% on a constant currency basis.

I’m impressed with this level of growth. These high-double-digit figures emphasise the strong demand for its products.

The outlook

What also pushed the Darktrace share price higher yesterday was that it upgraded its forward guidance. This is always going to be received positively by the market as it indicates the company is doing well.

It’s increasing its expectations for its 2022 financial year. It now believes that that ARR will improve year-on-year on a constant currency basis between 32% and 34%. This was previously 26.5% to 29.5%. It also expects year-on-year revenue growth of between 29% and 32% whereas this range had been 27% to 30%.

My view

While these numbers look great, I’m keeping the stock on my watchlist. In its prospectus, the company was shown as loss-making. But it now expects an adjusted EBITDA margin for its 2022 financial year of between 1% and 4%.

Although the numbers are small, this indicates that Darktrace believes it will become profitable in 2022. ’m taking this with a pinch of salt because it uses the term ‘adjusted’. I’d like to see the detail first on how it has arrived at the profit margin before I start buying. The company intends to release its 2021 full-year results in the week of 13 September. So I’m adopting a wait-and-see approach until then.

I’m not dismissing the prospect that the company will become profitable, but I’d like more clarity. If investors see any discrepancies, this could impact the stock. Especially given the level it’s trading at. I’d like to see more information on how it’s going to scale and its route to profitability. Just because it expects to become profitable doesn’t mean it will happen.

The Darktrace share price has been steaming ahead and the full-year results should be a reality check. Hence, I’ll be watching closely.

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Nadia Yaqub 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.

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