The Darktrace share price just exploded. Time to buy?

The Darktrace share price surged by double-digits after the company announced its half-year report. Zaven Boyrazian investigates.

| More on:

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Darktrace (LSE:DARK) share price erupted by over 16% this morning after management released its latest half-year report. What was in it that has investors so excited? And is it too late for me to snatch up some shares? Let’s explore.

The rising Darktrace share price

As a reminder, Darktrace is a cybersecurity technology business. The firm provides an AI-driven platform that leverages machine learning to automatically adapt whenever encountering a new threat. 

That certainly sounds like a promising platform. And it’s easy to see why investors are getting excited about Darktrace’s share price potential, especially looking at the latest results. The group has expanded its customer base to 6,531. That’s a 40% jump compared to a year ago, demonstrating a rise in popularity as a cybersecurity solution. And with the vast majority buying two or more products from Darktrace’s tool box, revenue has surged by 52%, reaching $192.6m (£143.9m).

Seeing such vast top-line growth is undoubtedly impressive. However, for technology companies this is somewhat expected. What I find more encouraging is that the company actually moved out of the red and into the black. Net income came in at $5.9m (£4.4m) achieving what most young technology businesses struggle with – finding a path to profitability.

With that in mind, I’m not surprised to see the Darktrace share price surge on this report.

Taking a step back

As encouraging as these figures might be, there remains a long road ahead. The emergence of profitability is a solid signal of progress, in my opinion. But the group still remains dependent on external financing. And it will likely stay that way until cash flows can expand further. That obviously adds an elevated level of risk, especially now that macroeconomic factors are reducing general capital liquidity.

What I’m also keeping an eye on are those customer numbers. While they’re heading in the right direction, some ex-clients have described the technology as “snake oil”. If that assessment is accurate, many of its new clients could be heading for the exit. Churn rates have fallen from 8% to 6.4% over the last 12 months, but I think it’s still too soon to draw any meaningful conclusions.

Having said that, my biggest concern actually lies with the valuation. The AI cybersecurity market is estimated to reach $46.3bn by 2027. By comparison, in 2020, the market size stood around $10.5bn. Needless to say, that’s a lot of growth potential for this business. 

However, with a market capitalisation of £3.2bn, it seems investors are valuing the firm based on future expectations rather than existing fundamentals. In my experience, that’s a recipe for enormous share price volatility – something Darktrace is no stranger to.

The bottom line

These latest results are an encouraging step in the right direction. But, personally, the valuation remains too rich for my tastes. And with other unknown factors surrounding this young business, I think Darktrace and its share price still have plenty to prove. Therefore, I’m keeping the stock on my watchlist for now.

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 assessed. Consider taking independent financial advice.

Zaven Boyrazian 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.

More on Investing Articles

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »