Why this AI-focused cybersecurity company could be a future FTSE 100 name

The FTSE 100 is lacking technology and growth-orientated stocks, but this rapidly expanding company could be the answer to the index’s problems…

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Darktrace’s (LSE: DARK) listing on the London Stock Exchange came at a time when many investors had lots of cash. From a price of £3.30 on the day of listing, the share price rocketed to a high of £10, before making a round-trip back down to its IPO price. The shares currently sit 56% below their all-time high. With the predicted growth in the cybersecurity industry, this stock could be a star performer in the FTSE 100 in the future, so now could be an opportune time for me to get involved.

Darktrace “interrupts in-progress cyber-attacks in seconds, including ransomware, email phishing, and threats to cloud environments and critical infrastructure”, or in simple terms, it uses artificial intelligence (AI) to prevent cyber-attacks.

For those unfamiliar with AI, it’s best described as software that learns from itself, therefore becoming increasingly efficient over time. This means that once Darktrace’s AI software is installed in a company’s systems, it learns where the most at-risk areas are and works to improve digital security there.

The software does so by providing technological ‘roadblocks’. For example, before an employee receives a phishing (virus-filled) email, Darktrace’s AI would block this email from entering the employee’s inbox. Even if the email reaches the person’s inbox (and he or she opens the email), Darktrace’s AI software would then block the virus from entering the system, and so on. There are multiple layers of protection, so even if an attack wriggles its way through one roadblock, it cannot take the company’s entire system down.

With the rise of technology, especially following the Covid-19 pandemic, the threat of cyber-attacks has risen exponentially. This is something many businesses are now aware of and are actively trying to counteract. In addition to this, with the turmoil created geopolitically due to the Russia-Ukraine war, I can’t help but worry that wars could become more commonplace. Look no further than the cyber-attack on the US Colonial Pipeline for evidence of this. All of this benefits Darktrace.

Darktrace is continually increasing the number of cybersecurity products it can offer, which has led to a boom in the company’s total customer base, from 4,677 to 6,531 year-over-year (YoY) to March 2022. In turn, revenues have risen 52% YoY, all of which comes in the form of subscriptions, giving investors greater certainty over future revenues. This is something I look for in any investment.

The company is growing rapidly, and its management is another positive point, with its founder Poppy Gustafsson still running the business as CEO 16 years after establishing it. Studies have shown that founder-led businesses tend to outperform others, as they are more likely to innovate and generate more valuable patents. Darktrace currently has more than 90 patents, confirming this observation and providing a competitive advantage over its peers.

With the company’s price-to-earnings ratio estimated at 43x 2025’s numbers, it is still expensive, but if it can grow its bottom line at a faster pace as its product offerings increase, Darktrace’s ratios may come down — and at this point I will add it to my portfolio.

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 considered so you should consider taking independent financial advice.

Peter McMullan 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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