The Darktrace (LSE: DARK) share price fell by 30% on Thursday morning after the cybersecurity company revealed that US private equity buyer Thoma Bravo had pulled out of takeover talks.
Alongside this surprise news, Darktrace reported its first annual profit and confirmed previous growth forecasts for the 2022/23 financial year.
Thursday’s slump is a painful blow for buyers who’ve held the shares over the last 12 months. But with the company now in profit, I’m wondering if Darktrace shares could offer a buying opportunity at current levels.
A painful loss: what next?
Let’s get the bad news out of the way first. One year ago, Darktrace shares were trading at about 725p. As I write, they’re hovering around the 335p level — a fall of 54%.
This drop means that a £1,000 investment in Darktrace stock one year ago would be worth just £460 today.
Most long-term investors have been in this position at some point. I certainly have. An investment hasn’t worked out as I’d hoped, and I have to make a decision. Should I continue holding, or should I sell to protect myself against the risk of further losses?
The approach I normally take is to take a fresh view on the business. Does the investment story still make sense to me? And is the stock’s valuation reasonable, or does it seem too expensive?
Making progress
As a potential investor, I’d only buy Darktrace shares now if I thought the company’s performance and its valuation both justified a bullish view.
Today’s results cover the year to 30 June and do appear to show some progress. Darktrace’s revenue rose by 45.7% to $415m last year, generating a pre-tax profit of $5.3m.
The company says that it saw good sales growth last year. Customer numbers rose by 1,808 to 7,437, while the outstanding value of live contracts rose from $763m to $1,004m.
This increase was driven by a 7.9% increase in the average annual recurring revenue (ARR) from each customer. New contract ARR rose by 13%.
These numbers tell me that Darktrace has been signing up more customers at higher prices than previously. The company may also be selling more services to its customers than in past years. Good news.
Darktrace shares: my view
Unfortunately, it’s not all good news. Darktrace continues to face reputational problems. The company’s founder, billionaire Mike Lynch, is currently fighting extradition to the US on fraud charges relating to his previous business.
Short sellers targeting Darktrace also suggest that the firm has an aggressive sales culture and have questioned why Darktrace appears to spend less on research and development than some rivals.
Despite these concerns, I think Darktrace has some attractions as a potential tech investment. However, I’m not convinced the shares offer good value at current levels.
My sums suggest that even after Thursday’s slump, Darktrace shares are trading on a whopping 90 times 2023 forecast earnings.
Given the question marks surrounding this business, that’s too much for me. I’m going to continue watching Darktrace from the side-lines, but I won’t be buying the shares at current levels.
