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Investors are buying Darktrace shares. Should I?

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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. 

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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. 

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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.

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