The Darktrace share price is over 700p. Can it rise further?

The Darktrace share price has risen over 100% since its IPO. Does this mean that it’s the time to bank profits or is this a UK share to buy?

| 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.

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 has exceeded expectations since its IPO, rising over 100%. Such an incredible post-IPO performance always piques my interest, especially in fairly recent start-up companies. So, what is behind this incredible rise, and should I be buying this stock for my portfolio?

The business

Darktrace is a cyber-security firm that uses artificial intelligence to help detect and deal with any cyber threats. As stated by the firm itself, this is a “fundamentally different approach” to cyber-defence. It is also hoped that the use of artificial intelligence will be able to thwart cyber-attacks that would have gone undetected by humans.

I find this business model promising. Firstly, it is clearly unique, and this helps distinguish it from other competitors. Secondly, due to increases in cyber-crime over the past few years, there is room for expansion in this area. These two factors offer a partial explanation for the rise in the Darktrace share price.

Such a unique business model has also attracted numerous different customers. In fact, Darktrace currently has over 5,000 customers, based in over 100 different countries. The represents growth of 42% over the last year. 

Other factors to consider

Growth prospects for the company are also strong. In fact, the company expects FY 2021 revenue growth of 40%, to at least $278m. During the current financial year, management also expects revenue growth of 29%-32%, up from a previous estimate of 27%-30%. This highlights the excellent potential of this UK share, a factor that will hopefully cause the Darktrace share price to rise further.

Even so, there are risks, including the firm’s unprofitability. Since its inception, the firm has incurred losses each year. Most recently, during the year to June 2020, it announced an operating loss of $25m. It is not expected to reach profitability over the next few years. Although unprofitability is common among tech stocks, it still means that outside funding is necessary, and this may include issuing more shares. This would likely have a negative effect on the Darktrace share price, due to share dilution.

Further, the company does have a high market capitalisation of around £5bn. Comparing this to expected revenues of $278m gives the company a price-to-sales ratio of around 26. This can be compared to other cyber-security firms, like Palo Alto, which has a lower price-to-sales ratio of around 10. This means that if Darktrace cannot maintain its strong revenue growth, investor sentiment could be dampened considerably.

The final risk is the potential conviction of Mike Lynch, who currently faces 17 counts of fraud and conspiracy in the US. Lynch owns 4.5% of Darktrace, and he would be forced to sell this stake if he was convicted. This potential controversy is an unwanted distraction for the company, and could also damage Darktrace’s reputation. 

Has the Darktrace share price got upside potential?

Overall, I am extremely impressed with Darktrace. It has a unique business model, in a high-growth area, and its current growth is excellent. As such, I feel that there is long-term upside potential. Despite this, I am also concerned by its current valuation and think that investors may use the recent rise in the Darktrace share price to bank profits, especially due to the Lynch controversy. This would lead to downward pressure on the share price and is the reason I’m staying away for now.

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.

Stuart Blair 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

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 »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »