The Darktrace share price has been surging — and it could climb higher

I think the Darktrace share price could have more room to run. Despite the competitive AI industry, the firm looks well positioned.

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Over the past 12 months, the Darktrace (LSE:DARK) share price has gained about 75% in price. Yet, in the last month, it dropped roughly 2.7%. Nonetheless, I’m convinced bright days will continue for shareholders despite the risks.

Automated threat responses

Darktrace offers a highly advanced form of cybersecurity. Its clients enjoy artificial intelligence-assisted threat detection and automatic responses. This greatly reduces the risk that companies face in their digital databases and workflows being hacked and corrupted.

From the get-go, I mustn’t forget how competitive this industry is. With AI being the hottest business field in the world right now, multiple heavily funded and developed enterprises are in on the action. The three biggest threats to Darktrace’s market share are likely:

  1. CrowdStrike: focuses on protecting individual devices, with services also extending to the whole network.
  2. Fortinet: focuses on a hardware-centric approach and offers a broad range of cybersecurity solutions that it can adapt to different frameworks.
  3. Trelix: focuses on incident response and forensics, utilising automation and machine learning. It also has threat detection and response systems.

Is Darktrace durable?

So far, management has proven incredibly strong at driving growth. Revenues have been increasing by approximately 41% annually over the past three years.

Now, this growth is anticipated to slow down considerably, partly because the company is becoming larger. However, Darktrace’s clever recurring revenue business model, which works via subscription, increases its chances of sustaining its finances over the long term.

One area that I’m navigating carefully is how the company’s AI evolves. We are entering a period where artificial intelligence is likely to grow in capability exponentially. Therefore management has to ensure its cybersecurity intelligence is learning and adapting appropriately. A failure to do this could mean other firms outcompete it.

Here’s the opportunity I see

Despite the risks with this investment, the shares have a price-to-earnings ratio based on future earnings estimates of just 8. Partly, I attribute that to the fact that the company has only recently turned a profit, so its net income is increasing quickly.

In addition, because the company is a software-as-a-service (SaaS) company, its margins are already very high. For example, Darktrace has a gross margin of 90%. That’s because there are much fewer production costs than in industries that require a lot of manufacturing.

In my opinion, this investment is quite high risk. However, higher-risk investments also come with higher rewards if they work out. That’s why I’m excited about this opportunity. As long as Darktrace keeps expanding its net margin, I think the public might start to get excited about this one, driving the share price higher.

However, there are no guarantees in life. So, I’m only looking at putting about 3% of my total assets in the company if I do decide to invest in it.

Putting AI into proper perspective

The notion that Darktrace is going to develop a fully autonomous cybersecurity system any time soon is not realistic, in my opinion. However, a lot of its marketing makes it seem perhaps more advanced than it really is. Therefore, if clients and the broader market catch on to this, the shares might not grow as fast.

I’m being cautious, but still optimistic with this one. It’s going on my watchlist for now.

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 Fortinet. 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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