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Is the Darktrace share price at risk of further declines?

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Following its IPO, the Darktrace (LSE: DARK) share price quickly rallied more than 200% to trade near 1,000p at the end of September. However, before the stock was able to break above this figure, investors started selling. 

Since then, shares in the cybersecurity business have fallen around 16%. Unfortunately, there could be further declines to come.

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The Darktrace share price outlook

Before I continue, I should note that it’s impossible to predict future share price movements. Equity markets can be incredibly volatile over periods of days or weeks. Still, in the long run, share prices should track the performance of underlying businesses.

That’s why here at The Motley Fool we like to concentrate on long-term company fundamentals rather than short-term market movements. 

That doesn’t mean we ignore short-term market movements. These can provide excellent opportunities for investors with longer-term perspectives to snap up shares at bargain prices. 

The Darktrace share price has been under pressure recently because a trio of private equity investors, KKR, Summit Partners, and Balderton Capital, have been offloading their shares.

At the beginning of October, these finance companies offloaded 25m Darktrace shares for 750p each. The sellers had lock-up arrangements for their stock, so they were unable to sell before this date. It looks as if the market has interpreted these trades as a sign that it could be time to take profits. 

Some investors may feel comfortable taking profits after the stock’s recent performance. However, I think there could be further gains to come. 

Booming market

The global cybersecurity market’s flourishing. Hackers are always looking for new ways to attack companies. Organisations like Darktrace are working flat out to deflect attacks. 

I think this arms race will only accelerate. After all, the world’s only becoming more digitised, and it seems unlikely criminals will just give up. 

Darktrace uses artificial intelligence to detect threats to customers’ networks. Due to this unique strategy, demand for its services is booming. 

I think this is a blue sky company. As long as the group continues to invest in growth and capturing market share, I believe the Darktrace share price will push higher. That said, I think it’s also likely the stock will continue to encounter turbulence in the near term. Especially if large sellers continue to dump stock. 

The threat of competition is also always going to hang over the stock. If Darktrace doesn’t invest enough in its offer, customers may quickly move elsewhere. 

Despite these risks, I’d use the recent declines in the Darktrace share price to buy the stock for my portfolio. I think it’s one of the best ways to invest in the digital economy, even though it may not be the first company investors think of when looking for tech stocks.

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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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