Darktrace (LSE: DARK) is a British-American cybersecurity company. It specialises in using artificial intelligence that autonomously defends its customers from cyber threats. It markets this technology as a “digital immune system”.
Since the stock’s IPO on 30 April, its share price soared from 250p to 360p within a few hours. It then rose to 765p by the end of July before falling back to 575p today.
This kind of volatility is usually a red flag for me, but technology stocks often take time to settle into a fair valuation.
It might be that its fair share price simply isn’t known yet and investing now could be rewarding. But the ‘price discovery’ process is a risky business.
Booming cybersecurity
The UK Government’s 2021 Cyber Security Breaches Survey shows that 31% of UK companies completed a cyber risk assessment in the past year. Some 39% of businesses have experienced a cyber attack in the past year, and of this 39%, 21% reported losing money, data or assets. This means that 8% of all UK businesses were financial victims of cyber attacks last year.
In the US, the 2021 government budget for cybersecurity is $18.78bn. Globally, it’s $123bn. Clearly, there’s money to be made.
This makes sense to me. Money is accessed on banking apps, partners on dating apps, and personal information on social media sites. As the world becomes ever more digital, the incentive for criminals to launch cyber attacks increases, as does the need for companies to protect their money and customer data.
I think Darktrace could become a global giant. Its services are clearly in demand. Clients include eBay, Pizza Hut and McLaren. It has resolved real world threats, including the WannaCry ransomware attack across parts of the NHS in 2017, and stopping Chinese hacking group APT 41 in 2019.
Darktrace in numbers
Customer numbers grew by 42% in the past year, and it now has 5,600 customers in over 100 countries. The company recently reported annualised recurring revenue (ARR) for FY21 of $340m, a 44% increase year-on-year. It expects this figure to rise to at least $354m in 2022.
However, with over $100m of losses since 2018, and no mention yet of future profitability, the company might struggle to keep shareholders interested for long enough to become profitable. If enough investors jump ship, the share price could fall further.
It’s worth noting that most technology companies lose money in their expansion stage. Apple, with a market cap of $2.4trn, is the most valuable company in the world. Few remember that it almost went bankrupt in 1996.
Untraceable investor
Investor Mike Lynch, who owns 20% of the company’s shares, represents another potential risk. As former CEO of Autonomy, he’s accused of artificially inflating its value when it was sold for $11.7bn to HP in 2011. In 2012, HP wrote off $8.8bn of Autonomy’s value and accused Lynch of fraud, suing him for $5bn.
This lawsuit from HP could make Darktrace’s plans to expand much harder. And with Lynch as a major investor, there’s also a question of whether its figures can be trusted. If the company needs more investor funding to expand, it could run into trouble.
However, I’d still buy Darktrace. I could lose my money. But I’d rather risk the potential loss than miss out out on what I think could be the next Apple.
