Shares in cybersecurity specialist Darktrace (LSE: DARK) are popular at the moment. Last week, for example, DARK was the fifth most purchased stock on Hargreaves Lansdown’s platform.
I’m quite bullish on the prospects for the cybersecurity sector as a whole. Going forward, cybercrime is only going to become more of a problem and businesses and governments are going to spend billions fighting it. Should I buy Darktrace shares for my portfolio then? Let’s take a look.
Should I buy Darktrace shares?
The first thing I want to know about Darktrace is whether the company has a genuine competitive advantage. There are plenty of great cybersecurity companies I could invest in today (Crowdstrike, ZScaler, etc). Is Darktrace an industry leader?
Looking at reviews of Darktrace’s cybersecurity solutions, I’m not 100% certain it’s a genuine industry leader. Gartner, for example, gives Darktrace a score of 4.4/5 while it gives Crowdstrike 4.9/5. Meanwhile, on software review site TrustRadius, Darktrace has a score of 8.7/10 while Crowdstrike has a score of 9.1/10.
I know this is a simplistic way of assessing competitive advantage but I think it’s helpful. These reviews indicate that there could potentially be better cybersecurity stocks to buy if I’m looking to invest in the best companies.
Strong growth
Turning to the financials, I’m impressed by Darktrace’s growth. Recent full-year results for the year ended 30 June showed revenue growth of 41.3%. Adjusted EBITDA for the period was up 233% to $29.7m.
There were plenty of other positives in the full-year results too. For example, the group recorded a 45.3% year-on-year increase in customers. It also upgraded its FY2022 guidance. For the year ending 30 June 2022, it now expects year-on-year revenue growth of between 35% and 37%, versus previous guidance of 29-32%.
It’s worth pointing out however, that there are other cybersecurity companies growing faster than Darktrace. Crowdstrike, for example, generated revenue growth of 74% over the 12 months to 30 June, according to my calculations. And over the next 12 months, Wall Street analysts expect top-line growth of around 46% from the company.
3 risks that could hit the Darktrace share price
Looking at the risks here, there are a few that stand out to me. One’s the fact that the company is unprofitable. The full-year results showed a net loss of $149.6m (up from $28.7m a year earlier). This is not a deal-breaker for me because it’s quite common for high-growth tech companies to be unprofitable in their early days. But it does add risk.
Another is that founder and majority shareholder Mike Lynch is facing extradition to the US on fraud charges.
A third risk is the valuation. Currently, Darktrace sports a forward-looking price-to-sales ratio of 31. That’s high. If growth slows, the share price could fall. Having said that, the valuation here’s well below that of Crowdstrike, which has a price-to-sales ratio of 53.
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 think there are better growth stocks to buy right now.
