Darktrace (LSE: DARK) shares made their debut recently through an Initial Public Offering (IPO). The stock listed at an IPO price of 250p and is currently trading at 353p. That’s an investment return of over 40% so far.
In December, I highlighted that Darktrace’s flotation was likely to happen. Now that it has, would I buy the shares? My rule of thumb, is to adopt a wait-and-see approach especially when a company has just come to market.
This is to let the euphoria surrounding the stock settle. I certainly don’t want to overpay. I’m doing the same for Darktrace shares and am keeping them on my watch list for now.
Darktrace: an overview
In a nutshell, Darktrace is a cybersecurity firm that uses artificial intelligence (AI). The tech company was founded in Cambridge in the UK in 2013 out of a collaboration of cyber experts from various government intelligence backgrounds and mathematicians.
Darktrace’s key offering is its Cyber AI Platform. This technology can self-learn, identify and autonomously respond to any cyber threats in real-time.
This all sounds impressive and it’s no wonder that the company has grown phenomenally since its humble beginnings. Darktrace now has 4,700 customers in over 100 countries and has more than 1,500 employees.
Bull case
Let me be frank. Any company with an online presence, which includes the vast majority, should be concerned about cybersecurity. It’s a rapidly growing industry and this should act as a tailwind for Darktrace shares.
This is certainly reflected in the company’s journey so far. I think it’s impressive that Darktrace has managed to launch and successfully float on the London stock market in less than 10 years.
The growth rate in sales in the last few years has been staggering. Revenue increased from $79.4m in 2018 to $137m in 2019 and $199.1m in 2020. This is an increase of 72.5% and 45.3% respectively. I expect this to continue given the high demand for cybersecurity products.
Bear case
While sales have been increasing, I’ve some concerns regarding Darktrace shares. The first is that the tech firm has been unprofitable for the last few years. It booked a net loss of $42.5m in 2018, $34.7m in 2019 and $28.7m last year.
Although the net loss is reducing as the company is scaling up, I don’t expect Darktrace to become profitable any time soon. This could weigh on the share price going forward.
Also, tech firms need to spend capital on research and development (R&D). Darktrace needs to innovate on the product front, otherwise it will be left behind its competitors. For now the proceeds from the IPO will fund this. But further spend on R&D is expected and could set back the company’s road to profitability in the future.
My other concern is that Darktrace received funding from Mike Lynch, who’s still an investor. He’s currently fighting extradition to stand trial in the US on various criminal charges. This could result in significant damage to Darktrace’s reputation and may impact the stock if there’s a negative outcome.
My view
I think cybersecurity is a growing industry but I’ll only be watching Darktrace shares for now. I’m waiting to see what happens with Lynch and if there are any repercussions for the company. I’d also like the firm to give an update on how trading has been.
