Shares in UK-listed cybersecurity firm Darktrace (LSE:DARK) have had a terrible run. Only a few months ago, the stock was trading near 1,000p. Today however, the share price is near 400p.
So what’s behind this massive share price fall? And is this a growth stock I should buy for 2022?
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Why Darktrace’s share price has crashed
In my view, there are several reasons why Darktrace’s share price has fallen. A negative report from broker Peel Hunt back in late October has certainly been one driver. Analysts at the investment bank initiated coverage of the stock with a ‘sell’ rating and a 473p price target. The market didn’t like this.
Insider selling also appears to have been a factor. When I last covered Darktrace shares, I noted the company’s fifth-largest shareholder, Vitruvian Partners, had just sold 11m shares at a price of 580p per share. Well, there has been more insider selling since then.
Indeed, my research shows that between 8-10 November, board member Vanessa Colomar sold nearly 1.5m shares at prices of between 622p and 639p per share. It’s worth noting that Colomar is the partner and co-founder of Invoke Capital. The other co-founder of Invoke is Mike Lynch, who is also the co-founder of Darktrace.
I also think valuation has been a key factor behind the share price weakness. Recently, we’ve seen a big shift out of expensive hyper-growth technology stocks and into other, more reasonably-valued areas of the market.
This has coincided with the US Federal Reserve’s moves to withdraw its stimulus. Back in September, Darktrace had a very high valuation (the price-to-sales ratio was in the 30s). So it has suffered from this market shift.
Should I buy Darktrace shares for 2022?
I’m quite bullish on the prospects for the cybersecurity industry as a whole. Cybercrime is a massive problem globally and the problem is only going to get worse in the years ahead. According to Cyber Security Ventures, cybercrime is set to cost the world $10.5trn by 2025, up from $6trn in 2021.
This means there are likely to be opportunities for long-term investors in the space in the years ahead. However, I’m not sure Darktrace shares are the best way to play this theme.
Even after the recent share price fall, the stock isn’t cheap. At present, analysts expect Darktrace to generate revenue of $391m for the year ending 30 June. That means the forward-looking price-to-sales ratio is currently about 10.1.
That’s not outrageous for a high-growth cybersecurity firm. However, it doesn’t leave a huge margin of safety. If growth in 2022 is disappointing, we could see some volatility here.
Another issue for me is that the company is not expected to be profitable in the near term. For this financial year, analysts expect the group to post a net loss of $24.2m. Unprofitable companies tend to be higher-risk investments.
I also have a few concerns over the insider selling. Insiders tend to know more about their companies. The fact that they have been offloading stock suggests a belief there’s limited share price upside in the near term.
But it’s worth pointing out that Darktrace is growing rapidly at the moment (41% revenue growth last year). And management appears to be confident about the future.
However, all things considered, I think there are better ways to play the cybersecurity boom.