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Is the Darktrace share price a bargain?

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Darktrace (LSE:DARK) is a cyber defence company that recently listed on the London Stock Exchange. Founded in 2013, it’s built a stellar reputation. So, is this a good long-term investment or a stock I should avoid?

What does Darktrace do?

Artificial intelligence (AI) is a booming field of interest to companies and investors. Darktrace uses machine learning coupled with AI algorithms to prevent cyber-attacks across the ever-expanding digital universe. That includes cloud networks, Internet of Things (IoT) and industrial control systems.

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This allows Darktrace to offer an intelligent cyber security system that mimics human intuition. It self-learns and identifies new attacks and insider threats based on its code readings. So, the intelligence system is continually learning what’s normal or not. This original design helps it evolve with the business, operating as if there’s an intelligent cyber analyst on the team.

Intelligence experts run the company. COO Nick Trim had a long career in the intelligence community, which included defending national security using cyber espionage. Meanwhile, Global chief information security officer, Mike Beck, previously worked for GCHQ.

Furthermore, CEO Poppy Gustafsson is a widely respected tech company leader.

The Darktrace share price has risen

After Deliveroo’s disappointing IPO, UK investors are wary of hugely hyped tech stocks. Nevertheless, I think Darktrace seems more promising. The company adjusted its valuation lower prior to listing after paying attention to wider market sentiment. Unlike Deliveroo, its share price climbed on debut, but not to sky-high levels.

Today the Darktrace share price is trading around 338p, which is slightly above its 330p debut. And the company has a £2bn market cap. 

Between 2018 and 2020, adjusted EBITDA improved from a loss of $27m to a $9m profit. Cyber security is a growing area of concern, and I believe it will be in demand far into the future, hopefully leading to more profits.

Risks to shareholders

One thing that’s been concerning investors is that Deliveroo and Darktrace received financial backing from billionaire Mike Lynch. He’s fighting extradition to stand trial in the US on various criminal charges.

In 2011, Lynch sold his company, Autonomy, to HP, but since then has been accused of overstating the company accounts. They already jailed his former CFO on similar charges. Lynch and his wife have an 18.5% stake in Darktrace, so his trial could cause negative sentiment for the company and share price losses.

The company doesn’t believe Darktrace is currently the target of a US Department of Justice investigation. But in its recently published prospectus Darktrace it said: “The group may face potential liability arising out of unlawful, and allegedly unlawful, activities in connection with the sale of Autonomy and related matters.

There’s undoubtedly a heightened level of risk investing in stocks at IPO. And with a criminal investigation clouding the future, the risk is magnified, which means I don’t think Darktrace is a classic ‘bargain’ share. However, I think interest in cyber security is rising and it’s something I’d like to invest in.

Covid-19 has changed the financial system and altered economies. Therefore, I think investment in cyber defence is only going to grow from here. Darktrace says its addressable market is worth approximately $40bn. I’m tempted to invest a small amount in the shares.

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Kirsteen 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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