Darktrace’s share price just dropped under 400p. Should I buy the stock now?
The Darktrace (LSE:DARK) share price hasn’t had the best run recently. In fact, since late October, the stock is down nearly 60%, falling to 393p today. That’s still higher than its April IPO closing price of 330p. But it does raise the question: after rising so high, why did it later collapse? And is this actually a buying opportunity for my portfolio? Let’s investigate what’s going on.
A future king in cybersecurity?
With the world becoming more dependent on technologies like cloud computing, it’s not surprising that the number of cyberattacks is on the rise. While that’s undoubtedly horrible news for most businesses and consumers, it has created a favourable environment for the cybersecurity industry. After all, the more threats, the more demand for such services.
Darktrace is a relatively new entrant to the sector. But it came in guns blazing with its AI-based platform. Using machine learning, this system automatically evolves each time it encounters a new threat. Once it understands how a piece of malware operates, it should quarantine the infected files and prevent any damage or exposure to sensitive data. In simple terms, it should behave like a self-teaching immune system for computers.
Looking at the figures published in its latest Annual General Meeting statement, this technology is proving to be popular. The firm now serves over 5,900 customers, 86% of them using two or more of its products. Consequently, revenue in its 2021 fiscal year (June to June) grew 41%, pushing its annualised revenue growth rate since 2018 to a staggering 51%.
Needless to say, that’s a lot of growth. And yet the Darktrace share price seems to disagree, given its downward trajectory. So, what’s going on?
The Darktrace share price versus uncertainty
There are undoubtedly numerous factors influencing the share price. However, the problems first started emerging after an analyst at the investment bank Peel Hunt released a pretty scathing report.
It claimed that the technology might not be as good as described on paper. In fact, the report stated that some customers described the AI-driven platform in negative terms. This could explain why the churn rate increased in FY21, with 7.7% of Darktrace clients deciding to terminate their relationship.
This is actually a risk I highlighted back in September. And combining bad news with Darktrace’s sky-high valuation is a recipe for a collapsing share price. But Peel Hunt placed its target at 473p. That’s around 20% higher than where the stock is trading today. Does this mean now is the time to buy?
Time to buy?
Today’s share price places Darktrace’s market capitalisation at around £2.7bn. That puts its price-to-sales ratio at approximately 12.7. This is certainly not cheap, but far more reasonable than previous levels. However, while this may be a buying opportunity, I’m concerned by comments surrounding its technology. After all, cybersecurity businesses live and die by their ability to protect customers’ data and systems.
If the company can’t meet the security requirements of its customers, then maintaining its current growth rates will be challenging over the long term. The future could be bright for the firm, but I’m going to wait and see how Darktrace performs as we enter 2022 and won’t be buying for now.
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Zaven Boyrazian 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.