The Darktrace share price just exploded! Should I buy now?

The Darktrace share price surged 30% last week after releasing its latest earnings report, but is there trouble ahead? Zaven Boyrazian investigates.

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The Darktrace (LSE:DARK) share price has been quite a stellar performer since its IPO at the end of April this year. And this month, the cyber-security firm saw its stock leap once again by double-digits. As a result, it’s up by over 160% since becoming a public company. What caused this explosive uptick? And should I be considering this business for my portfolio?

The Darktrace share price surges on results

Last week, the firm published full-year results for its fiscal 2021. And given that Darktrace’s share price surged by nearly 30% within a few days, I think it’s fair to say investors were pleased. Total revenue jumped by 41%, from $199m to $281m.

What’s more, the level of deferred revenue grew by 53.3% to $187.9m. Why does this matter? Darktrace often forward-sells its software package in contract bundles. These bundles can be claimed by the customers within a specific time period, usually within three years. But until they do, the firm has essentially received payment for a product that has not yet been delivered. Assuming it has no issues with providing its software to customers who choose to purchase it this way, the deferred revenue can be treated as additional income. This brings the adjusted total revenue to $468.9m versus $321.6m in 2020.

In my opinion, this level of explosive growth is quite encouraging. And seeing the Darktrace share price climb on the back of these numbers makes a lot of sense to my mind. But I do have some concerns.

The Darktrace share price has its risks

The risks and cracks that are emerging

There are plenty of cyber-security solutions available today. But what makes Darktrace stand out is its use of machine learning that allows its defence systems to naturally evolve as it encounters new threats. I must admit it’s pretty cool technology. But unsurprisingly, the cost of developing it is high. And marketing is even more so.

As a consequence, the company remains unprofitable, with its losses accelerating. In 2020, it recorded a loss of $28.7m. This year, that number was closer to $149.6m. Needless to say, this increases the risk surrounding the Darktrace share price.

An unprofitable technology company is not an uncommon sight, as these businesses focus on heavy reinvestment to fuel growth. However, these efforts may not be paying off. While the total number of customers has jumped from 3,858 to 5,605, not all existing clients were happy with the service.

Approximately 7.7% of existing customers decided not to continue using Darktrace as their cyber-security solution. Given the typical stickiness of this class of technology, that’s a little worrying, especially since this number has grown from 6.9% in 2020. Management has placed the blame on client pandemic-related budget cuts in early 2021, which is certainly plausible. But if this number continues to grow, the Darktrace share price could start to suffer.

The bottom line

As someone with a background in software development, this technology certainly sounds intriguing. But as an investor, this business looks a bit too young for my tastes. With limited financial and operating performance data, it’s hard to come to a reliable conclusion. So, for now, I’m keeping Darktrace on my watchlist, despite its share price potential.

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.

Zaven Boyrazian 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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