Can the Darktrace share price make an explosive comeback?

Originally Published by The Money Cog

The Darktrace Plc (LSE: DARK) share price has enjoyed an enthralling start to its journey since it went public in April 2021. But few predicted at the time this tech stock would swiftly come crashing down only six months later.

During the initial days after going public, Darktrace shares skyrocketed to 945p, representing a whopping 190% appreciation. But once the investor lock-up period ended, the tables turned for the tech company, as many began dumping their stock onto the public market.

It’s not entirely surprising given the current stock market environment. And doubtless, analyst concerns about the group’s valuation didn’t exactly help matters. Plus, when news broke out that customer retention was starting to get shaky after ex-customers reported the firm’s cyber security platform as a “gimmick”, investors’ nerves seemed to have hit a tipping point. And the Darktrace share price plunged swiftly thereafter, losing over half its market capitalisation by the end of 2021. Today Darktrace’s market capitalisation now stands at around £2.64bn.

The company continues to promote its platform as an ultimate solution for organisations to defend against cyber-attacks across the full breadth of digital environments. And when looking at the latest earnings results, there must be some truth to it since it continues to attract and retain new customers, at least for now.

Yet despite this promising performance, Darktrace stock continue to trade firmly below their 2021 peak. And throughout 2022, so far, this trend hasn’t changed with the stock has been fairly stagnant with a year-to-date loss of 10%. But is the share price on the verge of making an explosive comeback? Let’s investigate.

What does Darktrace do?

The group’s technology offers some unique features, which are:

  • Its platform can be tailored according to the needs of the customer.
  • It offers complete coverage of the organisation’s digital business.
  • Darktrace Antigena technology can detect and react to cyber threats in almost three seconds automatically.
  • The technology allows the investigation and reporting of 100% of alerts and threats.

In an era where cyber threats are becoming ever more prevalent. Using artificial intelligence and AI algorithms to fight off digital attacks certainly sounds like an alluring prospect. And not one offered by many of its peers and competitors.

Earnings and future vision

Despite what the Darktrace share price would indicate, the latest earnings report showed strong operating and financial performance, in my opinion. Its total customer base expanded by 32%, bringing the total to 7,400. And with existing clients ramping up spending, revenue growth for the period came in at 48%, reaching $417m.

Note that while the cybersecurity company is listed on the London Stock Exchange and the stock price is quoted in pence, Darktrace reports all its financial statements in US Dollars.

Meanwhile, the group’s recent acquisition of Cybersprint seems to be a complementary fit to its existing technology platform. Management also upped its guidance for profitability. Originally EBITDA margins were expected to fall between 15% to 17%. However, following the strong performance, the margin outlook improved to 19% for its 2022 fiscal year.

With free cash flow generation also on the horizon, it seems that Darktrace as a business is hitting some impressive milestones. And assuming that this encouraging progress can continue, the return potential for this business seems to be substantial, in my opinion. Although it’s worth noting that Darktrace doesn’t pay a dividend currently. And I doubt that will change in the immediate future as the group is heavily re-investing its capital to fuel future growth.

Will I be investing in Darktrace shares?

Darktrace is the inventor of self-learning AI systems for cyber defence, and it won the AI & Machine Learning Award at the 2022 Go: Tech Awards. To me, that’s quite impressive. But I’m not blind to the investment risks.

Despite being a relatively niche field, blending AI and cyber security is hardly a new concept. And the group faces stiff competition from key leading cybersecurity titans like IBM, Fortinet, Vectra AI, and Datadog.

Being a new entrant into this industry, Darktrace currently holds only a tiny portion of the global cybersecurity market share. That obviously presents an enormous opportunity for the business. And with high-double digit growth on its books, management appears to be making the right moves to capitalise on the opportunity.

Perhaps that’s why analyst forecasts for this stock are quite bullish, with an average share price target of 583p. Given that it’s significantly higher than where shares are trading today, this could present an excellent buying opportunity.

The volatility in the Darktrace share price seen so far does give me pause. However, personally, I’m cautiously optimistic about the future potential of this business. Therefore, I am considering adding some shares to my portfolio.

Original post

The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.

Written by The Money Cog

Founded in 2020, The Money Cog is a stock market research group publishing news and analysis to help investors make better investment decisions. The site provides in-depth evaluations of businesses as well as commentary on the latest developments within the British and American financial markets.

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