Why has the Darktrace share price just leapt 30%?

The Darktrace share price just skyrocketed. With a buyout possible, is now the perfect time to invest in this cybersecurity company?

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The Darktrace (LSE: DARK) share price shot up this week as news of a potential buyout was announced. On August 15, the company confirmed that it was in early-stage discussions with private equity firm Thomas Bravo. Since then, the stock has leapt from 413p to 538p. An incredible 30% jump in the share price within just a few days has certainly caught my attention.

Yet over the last 12 months, Darktrace’s share price actually fell by 4%. The cybersecurity provider saw tremendous increases in total losses and financing costs during FY21. This scared some investors away.

I remain bullish however. The company’s most recent Q4 report demonstrated concrete growth — and its prospects for FY23 seem strong. But what exactly will happen to Darktrace remains to be seen as the potential for a buyout looms. Let’s take a closer look.

Cybersecure and industry safe

Investment in technology stocks remains at the forefront of many investors’ strategies. With the cybersecurity company showing strong growth within the tech industry, I’m increasingly confident about Darktrace’s prospects.

A £40m acquisition of Cybersprint in February indicates the company is expanding its industry presence. Yet while management claims this acquisition will accelerate the capabilities of its Cyber AI Research Centre, I’m worried this will overburden it financially. That’s particularly so as Darktrace suffered an increase in total losses from £24m to £124m across FY20-21.

However, the expansion does come at an excellent time. CEO Poppy Gustafsson said: “Against a turbulent geopolitical background, it’s no surprise that long-term cyber risk is an even higher priority“. Gustafsson isn’t wrong. Continuing conflict between Russia and Ukraine has raised safety concerns for businesses across Europe and the US. With a 42% increase in global cyber attacks, attention has turned toward companies such as Darktrace.

While total losses are cause for concern, I think the acquisition will benefit Darktrace over the long term. At a time when industry demand is rising, the company seems well-positioned to capitalise on expansion and to drive forward its performance.

Looking forward

Awarded TIME magazine’s ‘Most Influential Company’ title for 2021, Darktrace has undeniably made an impact. But where exactly is the company headed?

It’s currently developing its Prevent family product, while its Attack Surface Management and End-to-End products were released at the beginning of this month. However, this was achieved only through an alarmingly-high increase in borrowing costs, rising from £2m to £90m from FY20-21.

Yet the Q4 results demonstrated that progress is being made. Total customers rose 32% to 7,400. As a result, Darktrace boasted a 47% increase in revenues, now sitting at £346m. With further products set to release, that progress could continue.

Also, Thomas Bravo’s takeover decision, with a deadline of 12 September, should have a significant impact on the share price. With FY22 results due on 8 September, this will be a manic few days for the Darktrace share price.

I’m usually averse to such volatility. However, I think the company has performed well this year. Its presence in the industry has expanded considerably. Also, its product development and sales strategy is bearing fruit. With notable growth prospects, I’ll be looking to add Darktrace shares to my portfolio now to hold for the long term. I just need to be prepared for a potentially rough next month if the buyout unfolds.

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.

Hamish Cassidy 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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