A cheap UK share for the cybersecurity boom!

I’m backing this UK share after its share price collapsed this week. In fact, I’ve recently added this cybersecurity stock to my portfolio.

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This UK share tanked earlier in the week when an executive was named in a legal row. Darktrace (LSE:DARK) fell after an executive was named in a judgement concerning malpractice in the sale of Autonomy to Hewlett Packard in 2011. The judge noted Nicole Eagan, then Autonomy’s chief marketing officer, as “part of a clique responsible with the defendants of the operation of the impugned levels”.

The Cambridge-based company sells AI technology that autonomously fights back against cyber-attacks in real time. The industry as a whole appears to be benefiting from a renewed focus on cybersecurity following Russia’s invasion of Ukraine. US President Joe Biden has urged companies to tighten their cyber defences.

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While Darktrace has demonstrated impressive growth in recent years, I also think it looks fairly cheap compared to its peers. Here’s why I’ve just bought it for my portfolio.

Valuation

The Darktrace share price collapsed this week, falling to 322p a share. It opened trading on Friday morning at 340p a share, giving it a market cap of £2.3bn. And taking into account the firm’s recent performance, Darktrace is looking cheap to me.

As the company has only just turned profitable, it’s best to look at its price-to-sales (P/S) ratio. The metric is calculated by taking a stock’s market capitalisation and dividing it by the company’s total sales or revenue over the past 12 months. Using the market cap from this morning, Darktrace has a P/S ratio of around 8.2. Compared to a number of its peers, I think this looks like good value.

Here’s how Darktrace stacks up against its peers.

StockP/S ratio
Darktrace8.2
CrowdStrike21
Palo Alto Networks8.8
Fortinet12.2

Growth

Darktrace has demonstrated impressive growth in recent years, although some analysts have questioned its sustainability. Total revenue increased from $79.4m in the year to June 2018 to reach $281m in the year to June 2021. Revenue for latest four quarters is $347.5m. This growth curve is certainly positive and there are indications that it will be sustained, at least in the near future.

The cybersecurity market is growing fast amid increasing confrontation between Russia, China and the West. Russia’s invasion of Ukraine and the measures introduced by Western parties against Moscow exacerbated existing tensions and engendered a greater focus on cyber defences. I feel this environment should lead to further growth for Darktrace.

A recent trading updated highlighted positive momentum in the months leading up to the war. Darktrace  added 359 net new customers in the third quarter. This took its client base to 6,890 at the end of March — 37.3% more than a year earlier. 

Despite this positivity, JPMorgan Cazenove started its coverage of the stock at “underweight“. The bank said that the path to sustainable profitable growth was unclear, noting potential competition challenges.

Will I buy more?

I bought at 325p earlier this week, and at this price, I feel I should have bought more. But, I actually think there’s plenty of growth in this share price. It’s not just me, Jefferies has set a 730p price target for Darktrace. I’ll continue to add this stock to my portfolio.

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James Fox owns shares in Darktrace. The Motley Fool UK has recommended CrowdStrike Holdings, Inc., Fortinet, and Palo Alto Networks. 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.

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.

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