This FTSE 250 AI cybersecurity company is up 109% in 12 months

Investing in this FTSE 250 AI cybersecurity firm could deliver high growth. However, the industry is rife with competition.

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Darktrace (LSE:DARK) has quite a unique position in the FTSE 250. It offers AI specifically tailored for cybersecurity, even providing autonomous responses to threats.

The company is relatively new, founded in 2013 with its initial public offering in 2021. Up 109% in just 12 months, I think there’s potential for these shares to deliver massive growth over the next decade. Here’s why!

Competing for the top clients

I’ve looked into the future of cybersecurity a lot, and there’s a lot of competition. For example, CrowdStrike, Palo Alto Networks, and Cisco are all leading the way in global AI cybersecurity efforts.

That being said, Darktrace is still in the right market. With high growth almost certain for the field in general, management just needs to make sure that they retain their customers over the long term. At the moment, some of these include McLaren, Steve Madden, Aston Martin, and many other prestigious firms.

Flourishing financials

In the last three years, the company has been able to pull off a revenue growth rate of 41% on average. That’s astronomical, although not unusual for a newer company in a high-growth field like AI.

In addition, the company reported its first profit in 2022, which is great news. With early-stage companies, it’s often the case that shrewd investors get in early. The general market then catches on to the opportunity once the earnings start to roll in. That’s a big contributor to why the share price is up 109% over the last 12 months.

The AI market is just getting started

One of the reasons I think artificial intelligence is such a prudent place to invest is that the consequences on society will be very tangible. The use of the technology should drive higher margins in almost all industries.

In cybersecurity, companies are going to face new levels of attacks from advanced capabilities. These will include those powered by quantum computing and AI. Therefore, it’s not a want but a need for organisations to implement the latest cybersecurity into their digital operations. Any breach can cause much more of a loss in reputation and revenue than the cost of hiring a company like Darktrace.

However, Darktrace has a market cap of around just £4bn. Compared to one of the more dominant cybersecurity providers, CrowdStrike, which has a market cap of around $76bn, I’m a little concerned that Darktrace won’t be able to keep up over the long term. AI is highly expensive to develop, run, and maintain. It’s the companies with the most money to invest in it that will likely end up having the best products and services.

Investing is all about psychology

Some people are deterred from investing in Darktrace or other cybersecurity firms because the price-to-earnings (P/E) ratios for many of these companies are way higher than normal. Darktrace, in particular, has a P/E ratio of around 42, and the average for the FTSE 250 is around 14.

The thing is, a company can sustain a high valuation for many decades in some cases. It’s all about demand.

The real concern is that expectations are high. If management doesn’t meet these, investors can sell off more quickly and aggressively than usual because the valuation is rich.

Nonetheless, I’ve added Darktrace to my watchlist! It could be a big growth story.

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.

Oliver Rodzianko has no position in any of the shares mentioned. The Motley Fool UK has recommended CrowdStrike and Palo Alto Networks. 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.

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