The Darktrace (LSE: DARK) share price is up 44% so far in 2023. But it’s had a few dips along the way.
We just had a new dip, of 5%, after the cybersecurity specialist released a Q1 trading update on 12 October. So is this a fresh chance to buy into this FTSE 250 tech stock that’s in a long-term upward trend?
Darktrace shares skyrocketed in 2021, peaking close to £10 before crashing. But that often happens with high-tech growth shares.
Second bull run
The real time to buy can be after the first bubble has burst, and we see a second, hopefully more sustainable, growth path.
Revenue growth
And we’re seeing growth at Darktrace, at least revenue growth. In the first quarter, revenue rose by 28% year on year, which was in line with expectations.
CFO Cathy Graham said: “Previously, we said two key targets for investment were increasing focus on larger prospect opportunities and driving deeper engagement with the partner channel. I’m pleased that in both cases, the first quarter delivered early, but clear, indicators of gaining traction.“
It seems that business, generally, is picking up.
What next?
Darktrace has stuck with its full-year outlook of annual recurring revenue (ARR) growth between 21% and 23%, at constant currency. That would mean full-year ARR between $133.8m and $146.6m.
The board also confirmed its target for total revenue growth of 22%-23.5%, with an adjusted EBITDA margin of 17%-19%. Free cash flow should come in at around 50%-60% of adjusted EBITDA.
So, all going according to plan. But the share price falls?
That often happens with growth stocks. The bulls tend to expect them to beat rather than just meet expectations. And when they fail to beat expectations as they hope, they give up. Confused? I know I am.
Buying opportunity
All it really means is that growth stocks are often pumped up based on too much optimism. And that’s what can give more rational investors an edge when share prices dip.
My biggest concern, though, is about profit growth. Oh, and the cash situation in the next few years.
At the full-year results in September, the firm told us it planned to increase its revolving credit facility, “to provide us with more flexibility if we were to for example see an acquisition,” in the words of the CFO.
She described any such move as “not our strategy, it’s opportunistic.”
Too quickly?
When I hear a company that’s still in its early growth stages start talking about acquisitions, I get a bit nervous. And plans to fund them with debt only raises my discomfort.
Trying to expand too quickly, while building up debt, has killed many a promising high-tech startup.
Still, there was no such talk in the Q1 update. And if Darktrace can manage its cash while resisting extravagant temptations, I could see a profitable long-term buy here.
It’s only for those happy to take the growth risks, though. And it’s not my cup of tea.
