The Darktrace share price plunges 30% in 10 days! Here’s what I’d do now

This Fool explains why he is looking past the Darktrace share price slump to concentrate on the firm’s long-term growth potential.

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The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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In the months immediately after its IPO, the Darktrace (LSE: DARK) share price rose nearly 200%. However, after topping out at almost 1,000p at the end of September, the stock has become increasingly volatile. 

Darktrace share price volatility 

Between October 22 and 25, shares in the cybersecurity firm slumped more than a fifth. The stock recovered modestly in the following days, but yesterday it crashed a further 15%. After these declines, the Darktrace share price has dropped by more than 30% in 10 days. Despite this performance, the stock is still up 96% from its market debut. 

As my Foolish colleague, Jonathan Smith pointed out yesterday, the stock slumped last week after analysts at broker Peel Hunt put out a research report claiming it was worth just 473p. In their report, the analysts stated that they believe there is a “disconnect” between Darktrace’s valuation and the “ultimate revenue opportunity“.

Further selling pressure hit the stock yesterday as a 180-day lock-up, which prevented investors on board at the time of the IPO from selling, expires on Wednesday. 

The end of the lock-up could see some of the group’s biggest backers, such as tech billionaire Mike Lynch, Darktrace’s first and largest shareholder, sell their holdings. This would put further downward pressure on the stock as the sellers try to find buyers for their positions. 

Valid concerns 

I can understand why investors have been selling their shares in the cyber security company. The note from Peel Hunt did contain some worrying conclusions. Further, significant insider selling could weigh on the stock price in near future. 

However, this is only likely to be a short-term factor, and there is no guarantee these insiders will actually sell. They could decide to hold the stock. This would have no impact whatsoever on the Darktrace share price. 

Another thing to consider is that while Peel Hunt thinks the company’s valuation is excessive compared to its market potential, it is not particularly extreme compared to US peers. 

US cybersecurity group Cloudflare is trading at a price-to-sales (P/S) multiple of around 100. Darktrace is selling at a P/S multiple of 23. 

Just because another company is worth more does not necessarily mean Darktrace deserves this valuation. It only illustrates that while one party might think the stock looks expensive, others may hold different views. 

Speculative play 

As such, while I can see the reasons why the market might have been selling the stock recently, I would still acquire shares in the cyber security company for my portfolio as a speculative investment. I am excited by its revolutionary technology and potential to grab market share in a growing market. What’s more, even though the shares might appear expensive compared to other UK equities, they are not too pricey compared to international peers. 

That is why I would be prepared to buy the stock and ride out the volatility. Even though some investors may not feel comfortable owning such a richly valued company. 

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 considered so you should consider taking independent financial advice.

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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