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As the Darktrace share price soars, is this a stock to buy?

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After today’s trading update, the Darktrace share price soared around 10% in early morning trading and is still up almost 5% mid-morning. This at one point took it to 700p, a rise of over 100% since its IPO in April. So, should I now be buying this UK tech stock or am I too late?

Trading update

Darktrace’s rise today is due to its excellent trading update. In fact, full-year revenues were 41.3% higher than last year at $281m. The customer base also grew by 45% to reach 5,605. The fact that customer numbers are rising is promising. The firm states that it uses a “fundamentally different approach” to cyber defence, using artificial intelligence instead of just humans. It is hoped that this can revolutionise the world of cyber defence. Accordingly, the fact that the customer base is rising gives me hope that it is currently successful in its aims.

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The Darktrace share price also rose due to the company raising its full-year 2022 expectations. Indeed, the firm now expects revenue growth of between 35% and 37%, up from previous guidance of 29%-32%. With future performance set to be strong, it is clear why investors, and the company itself, are optimistic.

But there were some worries that could be taken from the trading update too. In fact, the company recorded a net loss of around $150m, a rise of 421% from last year. Although a loss was expected, especially as it’s currently pouring money into developing its products, this was higher than I would like.

Losses are also likely to continue next year, as the firm continues to be impacted by share-based payments and employer tax charges that have resulted from its transition to a public company. This means that the current route to profitability is uncertain, and this is a risk that must be considered.

Other factors

One slight negative is the presence of Mike Lynch, the company’s first shareholder. Lynch was the founder of Autonomy and is now facing 17 counts of fraud and conspiracy in the US. This is due to accusations that he cooked the books at Autonomy before its sale to HP in 2011. The fact that Lynch and his wife own around 15% of Darktrace shares is therefore a negative, and something that could have ramifications in the future.

But fortunately, Darktrace’s connections with Autonomy seem to be limited, and management has no ties with Lynch’s former company. Lynch also has no role in management and is solely a shareholder. This should limit the damage, and hopefully the share price will not be affected.

What’s next for the Darktrace share price?

I believe that the share price has significant upside potential. This is because its products are in demand, especially as automated security functions are seen as the way forward.

Even so, its valuation is lofty, trading at a price-to-sales ratio of around 24. This implies that strong growth is already factored in to the share price, and any sign that growth is slowing will be punished severely. As such, despite the promise that this UK tech stock holds, the valuation is slightly too high for me. I’ll be waiting for a pullback before buying.

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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.

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