What’s going on with the Darktrace share price?

The Darktrace share price has been soaring since it made its London stock market debut. But should I buy after its trading update?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Risk reward ratio / risk management concept

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Darktrace (LSE: DARK) share price rose almost 4% yesterday after the cyber security firm released a brief trading update. In fact, since its London stock market float earlier this year, the shares have risen by over 80%.

Of course, past performance isn’t an indication of future returns. But it’s impressive for a company that has just come to market. As I mentioned, Darktrace released a short but sweet announcement, which I think is worth taking a look at.

The update

Before I start analysing the trading update, it’s worth mentioning here that yesterday’s release was the first meaningful news since the company went public. So it’s inevitable that myself and other investors are going to be watching very closely.

In short, the announcement was encouraging. The company expects to end its 2021 financial year on a positive note. It has increased its customer base by 42% year-on-year and now has roughly 5,600 clients.

Darktrace also expects revenue for 2021 of at least $278m, which is year-on-year growth of at least 40%.  The company also included another metric called Annualised Recurring Revenue or ARR.

For a tech company, I’d be looking for high repeat income as this indicates stability in sales. As of the end of June, Darktrace expected an ARR of at least $340m. According to the firm, this represents year-on-year growth of 44% on a constant currency basis.

I’m impressed with this level of growth. These high-double-digit figures emphasise the strong demand for its products.

The outlook

What also pushed the Darktrace share price higher yesterday was that it upgraded its forward guidance. This is always going to be received positively by the market as it indicates the company is doing well.

It’s increasing its expectations for its 2022 financial year. It now believes that that ARR will improve year-on-year on a constant currency basis between 32% and 34%. This was previously 26.5% to 29.5%. It also expects year-on-year revenue growth of between 29% and 32% whereas this range had been 27% to 30%.

My view

While these numbers look great, I’m keeping the stock on my watchlist. In its prospectus, the company was shown as loss-making. But it now expects an adjusted EBITDA margin for its 2022 financial year of between 1% and 4%.

Although the numbers are small, this indicates that Darktrace believes it will become profitable in 2022. ’m taking this with a pinch of salt because it uses the term ‘adjusted’. I’d like to see the detail first on how it has arrived at the profit margin before I start buying. The company intends to release its 2021 full-year results in the week of 13 September. So I’m adopting a wait-and-see approach until then.

I’m not dismissing the prospect that the company will become profitable, but I’d like more clarity. If investors see any discrepancies, this could impact the stock. Especially given the level it’s trading at. I’d like to see more information on how it’s going to scale and its route to profitability. Just because it expects to become profitable doesn’t mean it will happen.

The Darktrace share price has been steaming ahead and the full-year results should be a reality check. Hence, I’ll be watching closely.

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.

Nadia Yaqub 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.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »