The Darktrace share price is still overvalued. Here are 2 UK tech stocks I’d buy instead

The Darktrace share price has fallen 55% since its peak in September 2021, and while its outlook is improving, James Reynolds thinks it’s still too expensive.

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Key points

  • Darktrace isn’t currently profitable.
  • Wise is moving in the right direction.
  • Idox Group could have some serious growth potential.

The Darktrace (LSE: DARK) share price has fallen 55% from its peak of 985p in September 2021. Investors clearly grew overexcited after its blockbuster IPO in April. While the company’s revenue and earnings outlook are improving, I think they still don’t yet justify the share price. I like to invest in tech stocks because of their scalability and critical role in the modern economy. But I think there are a couple of other options that would be better for my portfolio.

Cybersecurity

I still think that Darktrace has the chance to do well in the future. The company is in excellent financial health, has no debt and all its assets easily cover its few liabilities. Its AI driven, machine learning approach to cybersecurity could be nothing short of revolutionary, and its subscription business model could lead to a massive user base over the coming years. The problem simply is that Darktrace isn’t profitable yet and hasn’t been for some time. Revenues have increased by $80m in 2021, but earnings fell to -$149m.

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Online payments

Wise (LSE: WISE) is an online payment and cash transfer company based in the UK. It too went public in early 2021 and it too saw its share price soar to 1,140p before slowly crashing back down to 649p at time of writing. A big difference between Wise and Darktrace however, is that Wise is profitable. Its margins are small, but 2021 has been a period of incredible growth for the company. Customers increased by more than 50% from 6m to 10m. Revenue jumped too from £302m to £421m. Again, only £39m of that was profit, but Wise has also been expanding into new territories and developing new products that could pay serious dividends in the future. These small profit margins could cause problems if the company runs into some unexpected issues, but for now all of the numbers are moving in the right direction. I’d be excited to add it to my portfolio.

Public sector software

Idox group (LSE: IDOX) is a software development company I’ve talked about a few times now. Currently trading for a mere 67.75p, it suffers even more acutely than Wise from small profit margins. It is profitable, but had a spotty couple of years in 2018 and 2019.

Earnings reports for the whole of 2021 have not been published yet, but for the financial year ending 31 October 2021, Idox reported revenue increased by 8% to £62.0m, and recurring revenue grew a further 2%.

If it can continue this growth over the coming years, I think we could see the share price rise significantly. It’s a bit of a gamble, but I’d happily add it to my portfolio.

What I’ve taken away from this research is that just because something is in the headlines doesn’t mean it’s a good investment. In fact, it could even mean the opposite. I’ll definitely keep my eye on Darktrace over the coming years, but for now there just seem to be other, better options for my portfolio.

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James Reynolds 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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