The Darktrace share price (LSE: DARK) has been tumbling over the last few trading days. It’s down another 5% or so this morning. I previously suggested that this could be a ticking time bomb for investors. And it’s not the only growth stock I’m keeping away from either!
Why I’m still avoiding Darktrace
I’m generally very bullish on the cybersecurity sector going forward. The sheer growth of online activity and the Internet of Things will greatly increase the pressure on businesses to protect customers and clients from any nefarious so and so.
Seen from this perspective, it’s not hard to understand why the Darktrace share price did so well initially. Unfortunately, I think we’re now seeing the (inevitable) backlash. Broker Peel Hunt’s less-than-complimentary research note was the catalyst, suggesting that the stock was worth only 473p. That’s less than half the level the Darktrace share price hit earlier in the year. That 473p is also 20% or so lower than the price as I type.
So could Darktrace fall to that level? Perhaps, if insiders began selling their stock. Some profit-taking may be inevitable. But cashing in as soon as the lock-up period ends today would send a message that even they think Peel Hunt may be right.
Not that I’d actually blame them. Despite the recent fall, Darktrace stock still boasted a heady valuation of 23 times sales before the market opened. That’s an awful lot of hope that remains priced in.
If I were to get exposure to this sector, I’d likely opt for a cheap exchange-traded fund such as L&G Cyber Security instead. It’s delivered a 36% return over the last 12 months. That’s a lot less than Darktrace (+81%) but one needs to consider the risk/reward trade-off. Had I picked up the latter’s stock one month ago, I’d actually be 25% underwater!
Another risky growth stock
Today’s half-year update only serves to confirm my belief that ticket app Trainline (LSE: TRN) is another growth stock I’d best avoid for now. Based on the double-digit percentage decline in its share price this morning, it seems I’m not alone.
Yes, the numbers look great initially. Net ticket sales and revenue jumped 179% to £1bn and 151% to £78m, respectively, in the six months to the end of August year-on-year.
But let’s get things in perspective. I didn’t see many people sprinting to catch a train last year. As such, the latest growth was always on the cards. Moreover, TRN still registered an operating loss of £9m, even if this was much better than the £43m loss reported this time last year.
My chief concern here is that far fewer of us are returning to the office than expected. The explosion in the property market this year would tend to back this up. That’s concerning for holders, especially as TRN already faces competition.
Making no change to previous guidance, Trainline believes it will generate full-year net ticket sales of between £2.4bn and £2.8bn. However, this is “assuming the market recovery continues“. With Covid-19 infection levels rising again, that may prove an assumption too far.
As an app, I like Trainline. As an investment, however, I struggle with it. Despite bullish talk of growth opportunities in Europe, I suspect ongoing (heavy) investment in staff and marketing will continue to impact sentiment.
As with Darktrace, I’m steering clear.