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Why I think the Darktrace share price is undervalued

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The Darktrace (LSE: DARK) share price soared higher after the company’s IPO last week. Soon after trading began, the stock was up more than 40% from its issue price. 

And I believe that even after this gain, the stock looks cheap compared to its potential. 

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Darktrace share price outlook 

To explain why I’m so excited about the company’s potential, I should start with its history. Darktrace was founded in 2013 by mathematicians from the University of Cambridge, artificial intelligence experts and cybersecurity specialists from GCHQ.

The business has since risen to become one of the UK’s premier cybersecurity companies. It uses artificial intelligence developed by its team of Cambridge mathematicians to hunt for vulnerabilities in IT systems. 

The global cybersecurity market is booming. It is projected to grow at a compound annual rate of 12.5% per annum over the next seven years. As a result, the market could be worth as much as $418bn by 2028, up from $163bn in 2020, according to these projections. 

Of course, these are just projections of this stage, but I think they show the scale of the opportunity available to companies like Darktrace. 

The firm’s CEO, Poppy Gustafsson, believes companies are engaged in an arms race with cyber attackers.

At the moment, Darktrace has the edge thanks to its AI tech. Yet Gustafsson doesn’t believe that will last long. This is both a risk and an opportunity for the group. If customers start to override its technology, customers could go elsewhere.

However, there will be an opportunity for the group and its collection of mathematicians and spies to develop the next generation of cybersecurity technology.

Growth trajectory 

As the world becomes more and more connected via technology, I think it’s only likely demand for cybersecurity services will grow. That’s why I’m so optimistic about the outlook for the Darktrace share price. In my opinion, the market is only really in its infancy. So there could be decades of growth ahead for the sector and its leading companies. 

Still, despite the opportunity, Darktrace will face risks and challenges as we advance. As noted above, it will have to overcome issues such as staying ahead of attackers and the competition. It is also far from profitable. Last year the group lost $54m on revenues of $199m. If the company continues to lose money, it could have to raise new funds in the future. 

Nevertheless, even after taking these risks and challenges into account, I’d still buy the stock for my portfolio. Over the next few years, I reckon the group can capitalise on the booming cybersecurity market, which should drive revenue and profit growth. As profits grow, the Darktrace share price should begin to reflect that expansion. 

What’s more, at the time of writing, the stock is selling at a price-to-sales (P/S) ratio of 13, which looks cheap to me compared to US peer Crowdstrike. The latter is trading at a P/S ratio of more than 50. 

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Rupert Hargreaves 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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