Should I invest in Darktrace shares as they rocket towards £6?

Darktrace shares are up nearly 75% in 2024 as the cybersecurity sector rallied, but is it too late to invest? Gordon Best takes a closer look.

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British cybersecurity firm Darktrace‘s (LSE:DARK) shares have been making headlines as they surge towards the £6 mark. With such momentum, many investors are left wondering whether now’s the time to jump on board, or is most of the growth behind us?

What does it do?

Founded in 2013, Darktrace uses artificial intelligence (AI) to detect and respond to cyber threats in real-time. Its innovative approach has garnered plenty of attention, leading to a successful IPO on the London Stock Exchange in April 2021. Since a decline following this event, the shares have generally seen growth, reflecting both market dynamics and positive company performance. The business turned profitable in 2024.

The company has reported incredible demand for for cybersecurity solutions amid escalating cyber threats globally. Additionally, expanding into new markets and industries has positioned it for further growth.

What really catches my eye is the firm’s unique AI-driven technology. This sets it apart in an increasingly crowded cybersecurity market. As cyber threats continue to grow in sophistication and scale, organisations are increasingly turning to advanced solutions to safeguard digital assets.

However, the market can get over-excited when it sees a product doing something innovative, especially in the AI space. A discounted cash flow calculation suggests the share price may be 10% overvalued at present. Similarly, the price-to-earnings (P/E) ratio of 43.8 times is well above the sector average of 41 times.

Risks

Cybersecurity is a dynamic and rapidly evolving industry, subject to regulatory changes, technological advancements, and evolving threat landscapes. Companies must continually innovate and adapt to stay ahead of emerging threats, which could require substantial investments in research and development. After all, one negative news story or incident can sink the reputation of a product for years.

Like any business in such a fast-moving sector, there are plenty of challenges and uncertainties that could impact future performance. With the share price more than doubling in the last year, any bad news could easily send that price down sharply. And as the company turns profitable, there’s a chance that growth could slow down, Maintaining the fundamentals of the business may take priority over growing market share. Earnings are estimated to grow by 6.2% annually over the next five years. That’s well below the 21% growth forecast for companies in the cybersecurity sector over the same period.

However, the balance sheet of the business seems to be in good shape, with debts well under control. Plus it has an experienced management team, and strong estimates for the future.

Overall

An investment in Darktrace shares as the head towards £6 could clearly be very successful. But I’m nervous about how far this trend can continue. When a share price doubles in a year, I always fear there may be some negative performance just around the corner. That could drive the price back down. For now, I’ll be steering clear, but will be keeping this one on my watchlist for the next buying opportunity.

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.

Gordon Best 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.

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