The Darktrace share price jumps 8% today! Has the firm finally turned a corner?

Jon Smith runs through the latest trading update and the benefit it provides to the Darktrace share price, as well as his thoughts from here.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Market Movers

Investing Articles

Down 13% today on results, is this FTSE 250 share too cheap to miss?

After slumping to multi-year lows, is FTSE 250 share Pets at Home now an excellent value stock to consider? Royston…

Read more »

Investing Articles

After FY results, why is the easyjet share price still less than half what it used to be?

After a strong set of results, our writer digs into why the easyJet share price is still far lower than…

Read more »

Investing Articles

The Compass Group share price looks ready for growth after positive 2024 results

The Compass Group share price is up 4% today following positive full-year results. Our writer considers its prospects in 2025…

Read more »

Investing Articles

As the Kingfisher share price drops on Budget fallout, should I buy?

The Kingfisher share price was on a strong 2024 run until the DIY group warned us of the possible effects…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

The JD Sports Fashion share price has just plunged another 16%! Buy or sell?

Harvey Jones is reeling after another sharp drop in the JD Sports Fashion share price. Should he seize the chance…

Read more »

Investing Articles

Nvidia share price dips despite strong Q3 results. What can we expect now?

Despite posting strong Q3 results after yesterday's market close, the Nvidia share price slipped 2.5% in aftermarket trading. Mark Hartley…

Read more »