The Darktrace (LSE: DARK) share price has now more than doubled since its IPO in April. That’s a huge boost for the London market’s ambitions to attract more tech-related firms. It also indicates just how important investors believe the cybersecurity theme will be going forward.
So, is it too late to buy the stock for my own portfolio?
The Darktrace share price: reasons to be wary
As an investment, Darktrace certainly appears to have a lot of promise. Its utilises what is known as ‘self-learning AI’. In practice, this means its software learns on the job. Picking things up from real-time data rather than from past cyber hacks is patently useful since it allows a company to respond so much quicker to threats. No wonder Darktrace has been so successful in attracting customers.
There’s also a lot to be said for the positive momentum seen in the Darktrace share price to date. Along with value and quality, this is another factor that, historically, has been shown to deliver great investment returns.
Notwithstanding this, there are a few things to be aware of.
Arguably, the most important of these is that this company is currently unprofitable. This could make the Darktrace share price volatile as time goes by. If inflation keeps rising, investors will become less inclined to hold ‘jam tomorrow’ stocks because cash flows aren’t expected for some time. Moreover, Darktrace could be hit by another rotation into battered value stocks that stand to benefit the most from a post-pandemic return to normality.
Regardless of macro-economic issues, there’s also the growing possibility that some traders will simply want to lock in some profit after such as great run. The likelihood of this will surely increase if Darktrace indicates it’ll shortly need to tap investors for more cash to implement its growth strategy.
A safer option?
An alternative to buying Darktrace is for me to pick an exchange-traded fund that tracks an index of cybersecurity companies. By far the most popular example on the UK market is the L&G Cybersecurity UCITS ETF (LSE: ISPY).
One big advantage to buying this fund is that it gives me instant diversification. This protects me to some extent if the market has a wobble. Moreover, the L&G fund is very liquid. In other words, it shouldn’t be hard for a holder to sell their shares if they really needed to.
There are however, some drawbacks. The 0.75% ongoing charge is high for a passive fund. I wouldn’t need to think about fees like this if I just bought and held Darktrace stock.
As you might expect, the recent performance also lags the Darktrace share price. Yes, a 24% gain over the last year is hardly a bad result. Nonetheless, it does endorse billionaire investor Warren Buffett’s belief that knowledgable investors can get better results by owning just a few companies, albeit at greater risk.
I’d buy the theme
On reflection, I’m happy to sit on the sidelines for now as far as this new-stock-on-the-block is concerned. A temporary pullback in the Darktrace share price looks pretty likely, in my opinion.
Even so, I do think it’s clear cybersecurity will become one of the most popular investing themes of this decade. For me to get some exposure at some point would be prudent.
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Paul Summers 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.