Darktrace (LSE: DARK) only floated on the London Stock Exchange in May, yet it’s already been a runaway success. As I write Tuesday, the Darktrace share price is up 10% on the day.
Since coming to market at 250p, the shares have almost trebled in value to 735p. So what’s it all about? Is this a ‘fly today, crash tomorrow’ fad stock? Or is there real long-term growth potential here? To answer the last question first, I’d cautiously say yes, I think there really could be. But there is risk there too, so let’s take a look at what’s been happening.
Darktrace is a cybersecurity firm, and that’s very much a growing industry. Only this week, Northern Rail suffered an apparent ransomware cyber-attack that took its brand new ticket machines out of action. And hardly a day goes by when we don’t hear accusations that Russia, China, or whoever has tried to hack into something critical. So there seems to be plenty to keep investors’ interest in the Darktrace share price keen.
Darktrace uses an artificial intelligence (AI) approach to the problem. And that sounds like a sensible way to go about it. After all, a human approach of analysing every attack after it’s happened and working out ways to prevent the same thing being repeated leaves the detectives a perpetual step behind the crooks.
Beating the humans
Chief executive Poppy Gustafsson made that point in the company’s trading update on 15 July. She said “Demand for our Self-Learning AI solutions is robust, as advanced cyber-attacks continue to outpace the human capability of security teams.”
It does sounds a note of caution in my mind too, though. The more I hear buzzphrases like ‘cybersecurity’ and ‘AI’, the more I picture growth investors jumping on without fully understanding things. How much of that lies behind the Darktrace share price’s gains to date is impossible to determine.
Still, the update does make business prospects look promising. The company ended the year to 30 June with approximately 5,600 customers, a rise of 42% over the previous year. The firm expects to report full-year revenue of at least $278m. And to give us an idea of how that’s growing, Darktrace also expects to see annualised recurring revenue at 30 June of at least $340m.
Darktrace share price valuation
This looks to me like a company on to a very good thing, and I expect to see significant growth over the next few years. The one thing I can’t work out, though, is whether Darktrace is genuinely worth in excess of £5bn today. We have no past earnings to go on, nor any fundamentals like a price-to-earnings multiple. And that’s a perpetual problem for investors looking at recent growth company IPOs.
The full results, due mid-September, should paint a fuller picture. I’ll wait until then before I try to get a handle on the Darktrace share price, and whether it represents a buy for my portfolio. But Darktrace is very much on my watchlist.
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Alan Oscroft 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.