Whenever I’ve covered the Darktrace (LSE: DARK) share price in the past, I’ve tried to highlight the general state of the cybersecurity industry.
The industry’s size is set to grow exponentially over the next decade as companies and consumers become increasingly aware of the global cybersecurity threat to their data.
Darktrace share price potential
Darktrace’s latest results provide some insight into this trend. In the first set of results since the company’s IPO in April, the group informed the market that annual revenues increased 41% in the 12 months to 30 June. Meanwhile, customer numbers jumped 47% to 5,605.
Commenting on these figures, management explained that due to a “spate of advanced ransomware attacks that have caused severe disruption,” customers are flocking to the business.
And it doesn’t look as if this trend’s going to end anytime soon. The company noted that the volume of cyber attacks on businesses is now so significant, it’s no longer possible to deal with this threat without the input of computers or artificial intelligence.
“Modern businesses are under constant attack,” Darktrace’s CEO Poppy Gustafsson warned.
This is where Darktrace has the advantage. AI powers the company’s cybersecurity software. It’s constantly scanning its customers’ computer networks to look for unexpected actions or developments. It can then act quickly to stop these attacks before they develop into something more serious.
As the system is constantly learning and developing, it’s far more powerful than traditional software. Traditional software can be exploited by attackers who know how to get around its defences. This competitive advantage should help the Darktrace share price.
The one downside of the company’s growth is that it’ll have to spend heavily over the next few years to increase its salesforce to meet demand. That’s a good problem to have, although it may mean the group will continue to report losses. Darktrace’s net loss hit $149.5m last year.
Still, overall, I think its share price has a bright future. It could even return to 700p and potentially exceed 800p in the long run, based on my analysis of its valuation compared to one of its US peers.
US peer Cloudflare is dealing at a price-to-sales (P/E) ratio of 74 at the time of writing. Darktrace is trading at a P/S ratio of 30. This implies the stock is very cheap, although there is no guarantee the company will ever achieve this valuation.
Of course, the company’s growth isn’t guaranteed. It has to continually invest and develop its product to stay ahead of the competition. It also has to invest to stay ahead of cyber attackers. One significant cyber breach of its software could have a considerable impact on its reputation. This could put an end to its growth story.
The group will also have to fight for talent. As the cybersecurity industry grows, companies will be seeking experienced developers and programmers. This could push wages up across the technology sector.
Despite these risks and challenges, considering the company’s growth and potential in the long run, I think the Darktrace share price looks attractive. I’d buy the corporation as a speculative position in my portfolio today.
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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.