I’ve been watching the Darktrace (LSE: DARK) share price slide from its peak in 2021, as the early hype faded. But with the bubble burst, I’ve kept hoping for a new growth phase.
Then on Tuesday, Darktrace shares jumped 20%. So what’s happening, and it is a good time to get in now?
No fraud here
The news of the day was headlined by the results of an audit by Ernst & Young.
It follows claims made by short seller Quintessential Capital Management in January, which questioned the validity of Darktrace’s financial statements.
Ernst & Young found no real problems.
Darktrace says the audit raised “a number of areas already known to [it] where systems, processes or controls could be improved.” But there should be no impact on previous results.
“We trust that all stakeholders are reassured by these outcomes,” said board chair Gordon Hurst.
Revenue growth
Darktrace posted a trading update for the full year too.
It showed a 31% rise in revenue, which looks good to me. At constant currency, it’s only a bit less than that, with annual recurring revenue (ARR) growth at 29.2%.
At this stage, I think building customer numbers could be more important than this year’s revenue. And on that score, I liked what I saw.
Darktrace recorded an 18.3% rise in customer numbers. That’s 1,362 net new customers in the financial year, with 396 in the fourth quarter. The customer base stood at 8,799 at 30 June.
Cybersecurity
In the future, I can only see the number of firms wanting to beef up their digital security rising.
I mean, I’ve just read a story of millions of sensitive US millitary emails being sent to Mali by mistake. It seems it was down to someone typing ‘.ml’ instead of ‘.mil’.
That one was a dumbware failure rather than software. But there’s plenty of high tech snooping and hacking going on.
CEO Poppy Gustafsson pointed to ChatGPT as having made an impact, saying: “The risks of IP loss, data protection breaches and evergreen novel attacks at scale are now much higher.”
What profit?
The big thing with Darktrace, and the biggest risk in my view, is profit.
Analysts have a bottom-line loss down for this year. And small profits marked in for the next couple of years would put the stock on high price-to-earnings (P/E) valuations.
At this stage, the P/E doesn’t help much when we try to work out a valuation.
Still, the firm did say it expects to record an adjusted EBITDA margin of at least 22%, ahead of previous guidance.
Will I buy?
I won’t buy Darktrace shares myself. But that’s just because it doesn’t fit my strategy. I prefer cash cows that pay dividends these days.
But it has all the things I used to look for in growth stocks in the past. There’s profit just around the corner, and strong growth in customers and sales. And there’s a protective technology moat.
There’s still big risk. But I think the Darktrace share price could have a good bit further to go.
