Darktrace (LSE: DARK) shares have been on my growth stock watchlist for a while following their meteoric rise from an IPO price of 250p per share to a 52-week high of 1,003p in September 2021.
After more than quadrupling in value in a matter of months, the Darktrace share price has since gone into reverse. It plummeted in late 2021 and has declined further in 2022, culminating in the company’s ejection from the FTSE 100 after spending just one quarter in the index.
However, the now FTSE 250-listed company is a rare breed — a homegrown UK tech stock with strong growth potential. The Cambridge-based cybersecurity business was established nine years ago by mathematicians, former GCHQ spies, and artificial intelligence experts. It specialises in protecting a worldwide customer base from sophisticated threats, including ransomware and SaaS attacks.
A downturn in the Darktrace share price
The first serious headwind for the Darktrace share price emerged last year when broker Peel Hunt released a negative investor note. Slamming the company’s then valuation of £7bn, Peel Hunt issued a target share price of 473p. This was well below where Darktrace shares stood at the time. The note’s publication marked the beginning of a change in fortunes for the growth stock, precipitating a 20% decline.
This year, Darktrace is affected by legal proceedings concerning the sale of software company Autonomy to Hewlett Packard a decade ago. Mike Lynch, a Darktrace co-founder, was indicted earlier this year. His extradition to the US to answer criminal fraud charges has been approved. Lynch has since resigned as an adviser to Darktrace.
Darktrace’s strategy chief, Nicole Eagan, has also been named in a UK high court ruling as “part of a clique” connected to Autonomy’s fraudulent sale. Heavy selling of Darktrace shares by company employees and insiders after this news depressed the company’s share price further.
Huge potential
There are undeniable risks that come with investing in Darktrace shares, but they look oversold to me at present. The latest financial results offer me some comfort in arriving at this conclusion.
In Q3, FY2022 Darktrace delivered year-on-year revenue growth of 50.1% compared to the same quarter last year. Revenue for the quarter totalled $109.8m. In addition, the group grew its customer base by 37.3%. These positive results demonstrate Darktrace is still a growth stock with strong potential in my view.
The global cybersecurity market should see a double-digit compound annual growth rate over the coming years. Indeed, Russia launched a number of cyberattacks with a Europe-wide impact immediately before it invaded Ukraine. As geopolitical tensions rise, Darktrace shares could benefit from growing demand for its services.
Would I buy this FTSE 250 growth stock?
I’m acutely aware that Darktrace is a high-risk investment. There are legitimate concerns over the company’s culture following the involvement of senior executives in damaging legal rows.
Nonetheless, I see the current share price as an attractive entry point. I’d only allocate a small portion of my cash reserves to Darktrace shares — but I believe there’s a good chance this could be a profitable investment in the long run.
