Darktrace (LSE: DARK) shares have experienced a major pullback recently. Not so long ago, the cybersecurity stock was trading near the 1,000p mark. Today however, it’s trading under 300p.
Is this an opportunity to pick up one of the UK’s most exciting tech stocks for my portfolio at a great price? Or is this a growth stock to pass on? Let’s take a look.
Darktrace shares: is now the time to buy?
There are certainly things to like about Darktrace from an investment point of view. For starters, it operates in a high-growth industry. According to data and analytics company GlobalData, global cybersecurity revenue is expected to rise from $220bn in 2021 to $334bn in 2026.
At the same time, it operates in quite a ‘defensive’ industry. In a recession, companies can potentially cut back on things like marketing and advertising. They can also cut back on general technology spending. However, they can’t afford to cut back on cybersecurity spending. The risks are just too great.
This combination of growth and defence should provide strong tailwinds for companies that operate within the industry in the years ahead. It’s worth noting that this financial year (ending 30 June 2023), analysts expect Darktrace’s revenues to increase 35% to $562m.
Another thing I like here is that Darktrace is forecast to generate a profit this financial year. Currently, analysts expect net profit to come in at $28.2m. This is important, as profits should bring some stability to the share price. In the current environment, investors don’t have a lot of time for companies that aren’t making any money.
Risks
I need to weigh up risk versus reward however, and in this case there are some big risks to think about. Let’s start with the valuation. Currently, analysts expect Darktrace to generate earnings per share of $3.43 this year.
This means that at the current share price, the forward-looking P/E ratio is near 90. That’s high. This adds a lot of risk to the investment case. If future results are below expectations, the stock could experience a sharp fall, given its high valuation.
There’s also the level of competition Darktrace faces. The cybersecurity industry is highly competitive and Darktrace is going to have its work cut out to acquire and retain customers. It’s up against some big players, including the likes of CrowdStrike and Palo Alto Networks. Analysts at JPMorgan believe the company will need to make significant investments to remain competitive.
Finally, there’s still uncertainty over major shareholder Mike Lynch, who faces US extradition over fraud charges. He may have to dump a lot of Darktrace stock if he’s handed a large fine by American authorities. This could put pressure on the share price.
My move now
Weighing this all up, I’m happy to leave Darktrace shares on my watchlist for now. All things considered, I think there are better growth stocks to buy for my portfolio today.
