The Darktrace (LSE: DARK) share price has risen more than 100% since the company’s IPO in April. I think this performance is highly impressive.
Unfortunately, it looks as if the stock is currently taking a breather. Over the past week, shares in the cybersecurity business have declined 4%. But could this be a sign of things to come?
After the company’s impressive performance since listing, are investors starting to move on to other stocks and could this be an opportunity for me to invest?
Past performance should never be used as a guide to future potential. So, before I try to decide whether or not it’s worth buying shares in the cybersecurity group, I’m keen to discover what the future holds for the business.
Cybersecurity is a booming industry. As the world becomes more digital, criminals are adapting. Cybercrime exploded last year as criminals took advantage of unprotected and naive consumers.
To put these risks in perspective, according to Cybersecurity Ventures, the damage related to cybercrime is projected to hit $6trn annually by 2021. The size of the UK economy is only $3trn.
To try and counter risks, spending on cybersecurity will reach $134bn globally in 2022. And with the number of risks growing, I don’t think it’s going to stop there.
Looking at these numbers, I think it’s highly likely demand for Darktrace’s services is only going to increase as we advance.
The outlook for the Darktrace share price
Unfortunately, it looks as if the company is struggling to turn the rising demand for its services into profits. It’s reported losses of $107m since 2018, and City analysts believe this trend will continue.
Indeed, analysts have pencilled in a net loss of $6m for 2021 and $24m for 2022, even though the City is forecasting that group revenues will hit $280m in 2021 and $367m in 2022. These numbers make it quite challenging for me to place a value on the Darktrace share price.
Still, it’s not uncommon for cybersecurity companies to report losses. The firm’s US peer, Cloudflare, has lost $340m since 2016 on cumulative revenues of over $1bn.
As such, some investors use the price-to-sales (P/S) ratio to value these companies. Cloudflare is trading at a P/S ratio of 77. Darktrace is selling at a ratio of 29.
On this basis, the stock looks cheap, suggesting it can continue to rise in value. That said, such a high valuation is always going to expose a stock to risks. If it doesn’t live up to growth expectations, investors could quickly sour on the business, sending the shares plunging in value.
Many different factors could cause Darktrace to miss expectations. A potential cyber attack on the company may be the largest, as this would significantly damage its reputation.
Considering all of the above, I think investors are waiting to see if it lives up to expectations before buying the stock. Therefore, the Darktrace share price could continue to languish.
I’d follow suit. I wouldn’t buy the stock until we have more clarity on the company’s potential.
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Rupert Hargreaves 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.