Since the Darktrace (LSE:DARK) IPO back during the pandemic, I’ve struggled to find a compelling reason to buy. Part of the fact can be put down to the initial frenzy of excitement that pushed the share price up to ridiculous levels. Yet with the noise now over and the business focused on growth, should I look to change my view?
Fresh trading update
To begin with, let’s consider the reason behind the spike in the stock today (11 April). The latest trading update came out, with plenty of reasons to be positive.
Annualised recurring revenue (ARR) was up 23.5% versus the same time last year. Given the nature of contracts that are signed with clients, this is the preferred revenue metric used by the business.
The update for the full-year outlook was also impressive. For example, it narrowed the expected ARR percentage growth range to between 22.25% and 23% (previously set at 21.5% and 23%). For context, the increase of the midrange here reflects an additional $2.4m of revenue.
Demand going forward
The stock is up 78% over the past year, reflecting the growth in the business. Demand is high and I believe that this will only increase due to the rise in artificial intelligence (AI). For all the good sides of AI, there’s a dark side, related to cyber attacks and fraud attempts.
Darktrace is well positioned to benefit from this. It recently launched an ActiveAI security system for clients. This aims to improve visibility and combat security gaps and raise alerts for weaknesses.
Given the growth to come for AI across different sectors, I think Darktrace could see a large uptick in new clients that come flocking for security against it. This could be the largest area of growth for the firm over the coming years.
Still expensive
One concern that I’ve had in the past is the hype around the stock. It has been branded as the tech poster child of the UK. Of course, it’s doing well, but I often feel the stock is overvalued.
At the moment, the price-to-earnings ratio is 60.58, well above the benchmark figure of 10 I use for a fair value firm. Granted, growth stocks like Darktrace can often have a higher multiple, as people expect future profits to rise. Yet at 60 I don’t necessarily feel this is a good deal.
Profits at the business have been erratic in recent years. It had a very poor 2021 and lost $143m. After barely breaking-even in 2022 it posted a profit of $43m last year. It looks set to post another profit for 2024. Revenue has been growing each year over this period, yet various different forms of expenses and costs have hampered it filtering down to the bottom line.
Better options elsewhere
I do think the business is heading in the right direction. Yet I still don’t see enough to want to get involved. If I want tech exposure, there are better options in the US. If I want exposure to AI, again there are cheaper and more compelling opportunities. On that basis, I’m going to pass.
