Can the Darktrace share price make an explosive comeback?

The Darktrace share price has fallen below 300p for the first time since its IPO. This Fool analyses if now is the right time for him to invest.

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Since its initial listing in April 2021, the Darktrace (LSE:DARK) share price has had an eventful time on the market. The much-anticipated debut was met with strong investor interest, the stock jumping nearly 200% in six months. But in October 2021, top tech stocks started losing the momentum they gained during the pandemic. And Darktrace was no different. 

Inflationary pressures and market corrections have caused global indices to fall and the Darktrace share price is down 68% from its all-time high of 945p, currently trading at just 295p. But I refuse to overlook this UK cyber security firm and I think the share could be a big winner when the current bear market ends.

First, let’s understand what the company does. Darktrace’s Enterprise Immune System is AI-driven software that learns the usual activity within a company’s network of devices. It can then detect ‘threats’ in real-time and neutralise cyber-security attacks swiftly.  

Solid financials

In 2022, global tech firms are struggling to maintain pandemic growth rates. Meta has recorded slowing profits and revenue growth in the last two quarters. Similarly, companies like Netflix and Microsoft have seen a drop in customer retention and profit margins, respectively. With giants struggling and extended periods of economic uncertainty worldwide, it’s clear why the pandemic-driven tech boom has come to an abrupt end. 

But the case with Darktrace is slightly different. The UK cyber-security firm recorded 41.3% year-on-year (YoY) revenue growth and a 45.3% YoY growth in customers in the financial year (FY) 2021.  And in the first half (H1) of 2022, the company recorded $1.92bn in revenue, up 52.3% from the same period in 2021. The board expects revenue growth between 45.5% and 47% for 2022. And I think this is a sign of a healthy business with strong sales.

Darktrace share price set to explode?

With defence budgets increasing worldwide, cyber security has quickly become a huge area of focus. Governments and large private institutions are spending a lot on protecting sensitive information. The growth of cryptocurrency and other digital assets means computers now double up as wallets holding billions in transferrable assets worldwide. 

But despite the projected demand for its services, the Darktrace share price comes with a few concerns. The big trigger behind the initial collapse was company insiders profiting after the IPO took off. Large insider sell-offs are concerning for investors. While 26% of the company’s shares are still held by insiders, it’s never a good sign when management chooses to cash out during a bull run.   

Another area of concern is slowing new customer growth. While the company saw a 45% YoY increase in subscriptions in FY2021 which dropped to 39% in H1 2022. Given the increasing operational and R&D expenses for Darktrace, this could trigger a fall in revenue.

I’m very bullish on Darktrace’s tech and I think the services it offers will grow in importance over the next decade. But I also want to protect my money and invest at the right time. Another tech crash is very possible in 2022 and I don’t expect explosive growth any time soon. But I’m watching the sector closely for signs of a turnaround. And if the Darktrace share price drops below 200p, it could become a bargain that I simply can’t miss.

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.

Suraj Radhakrishnan 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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