The Darktrace (LSE: DARK) share price has been extremely volatile recently, falling from highs of nearly 1,000p in September to its recent low of 580p at the end of last week. After yesterday’s 10% rise, the shares have managed to rebound to 650p. This is still around a 100% rise since its IPO in April. So, can this momentum continue and will the stock be able to reach its former highs?
What caused the recent rise?
There are a few factors that may have caused the Darktrace share price to rebound slightly yesterday. First, an analyst note from Berenberg stated that the recent share price plunge has been driven by “fear not fact”. This contradicted Peel Hunt’s negative broker note a fortnight ago, which stated that Darktrace shares were severely overpriced and that its product was a “gimmick”. As such, a more positive viewpoint on the company has clearly helped restore some investor confidence.
Furthermore, there has been evidence of some insider buying recently, as Chairman Gordon Hurst bought 25,000 shares at a premium last week. This shows that some insiders of the company are confident that the Darktrace share price is still too cheap and has room to rise further. This indicates that the recent share price dip may offer an excellent opportunity to buy some shares.
But not all investors share this confidence. Indeed, the lock-up period, which prevented certain shareholders from selling their shares for 180 days after its IPO, has recently ended, and multiple parties have sold. This included Deep Defence, a subsidiary of the private equity firm Vitruvian Partners, which sold a third of its holdings for around £70m. Other major investors, including Summit Partners and KKR, have also sold shares.
One worry I have is that the company is valued too highly. The company is predicted to record fiscal 2022 revenues of around $382m. This places the cyber-security operator on a forward price-to-sales ratio of around 16, which is high in comparison to other UK shares. Further, due to its current unprofitability, it’s very hard to place a reliable valuation on it. This enhances risk and may indicate that the Darktrace share price has got more room to fall.
Despite this, the cyber-security market is growing quickly, and other cyber-security firms also have very high valuations. For example, US firm Cloudflare has a forward price-to-sales ratio of around 102. Like Darktrace, Cloudflare is also unprofitable. While this may indicate that Cloudflare is extremely overpriced, it could also show that Darktrace isn’t actually overly expensive.
Darktrace is also seeing strong growth. In fact, for the next financial year, revenue growth is expected to be around 36%. This is not too far behind the 47% that Cloudflare is expecting. This shows that Darktrace has the potential to compete with many of the other big companies in the cyber-security market, and this could see the Darktrace share price soar over the next few years.
Can the Darktrace share price rise further?
I’ve always avoided the shares due to their lofty valuation. Nonetheless, after the recent dip, and considering the firm’s growth prospects, the share price seems far more reasonable. This means that there seems some scope for the shares to rise further. Therefore, I’m tempted to start a small position for my portfolio.
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Stuart Blair 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.