The Darktrace (LSE: DARK) share price has had an incredible start since its IPO in April, with the price rising over 100%. This cybersecurity tech company is still young and has a lot of room for growth.
However the share price has dropped by almost 10% since the end of July. Is this dip reflecting the realisation of potential issues for Darktrace?
Possibly, but this Fool reckons that the drop in price has provided an excellent window for adding the stock to his portfolio. Here’s why.
Risks
First let’s address the reasons why the Darktrace share price might be suffering a dip at the moment. On 15 July, it released a trading report on its FY21 performance and expectations for FY22. In this, there was no mention of profits and it turned in an operating loss of $25m.
This could lead to investors becoming bearish on the stock and the share price could be quite volatile for several years to come. In this early development stage, I think some investors are concerned that it is just too soon to tell how the business will develop.
Another possible concern I have is that Darktrace shareholder, Mike Lynch is appealing against extradition to the US on fraud charges. The Darktrace share price took a hit when this news was revealed, and it could seriously affect it again in the future.
Cybersecurity needed more than ever
Fortunately for Darktrace, revenue for UK cybersecurity companies is constantly rising. In 2017, it’s estimated that revenue for the cyber security sector in the UK reached £5.7bn. In 2019, this figure grew to £8.3bn and in 2020, £8.9bn. That’s a 56% increase in spending from 2017 to 2020.
I believe that investment in this sector is more than justified as four in 10 businesses, and a quarter of charities, saw cyber attacks between March 2020 and March 2021.
Darktrace itself is estimating annualised recurring revenue (ARR) of at least $354m for FY22 and ended FY21 with approximately 5,600 customers. This was more than its competitors such as Okta and Crossword Cybersecurity.
Despite the company’s lack of profits, I believe these revenue figures and the high consumer demand are good indicators that the Darktrace share price will continue to do well in the future.
A long-term investment
I do think it is possible that there could be some uncertain times ahead in the near future for the share price. Especially if the company continues to require outside funding to make up for losses. I think investors are waiting to see if this stock will live up to its expectations.
However, Darktrace is accumulating lots of customers and its product systems are easy to adapt for big corporations like banks and AI cloud companies, as well as for medium and small companies. Over the long term, I think Darktrace will be a good addition to my portfolio, and with this dip in price I will be building my position sooner rather than later.
