Regular readers of my articles will know that I think the Darktrace (LSE: DARK) share price has attractive potential as a growth investment.
The global cybersecurity market is growing at a double-digit annual rate, and Darktrace is uniquely positioned to capitalise on this growth. The company develops artificial intelligence-powered software to root out and disrupt cyberattacks before they occur.
The unique nature of this product means that some big-name corporations have already signed up for the company’s protection services. And as long as the business continues to invest in its software, I think it should be able to ride the growth of the cybersecurity market over the next five years.
Investing for success
Investing enough is probably the most prominent challenge Darktrace faces. The cybersecurity market is essentially engaged in an arms race between bad and good actors.
Hundreds of billions of pounds are flowing into the sector every year on both sides, and companies like Darktrace need to make sure they are investing enough to stay ahead of the rest of the market. They need to make sure they invest enough to stay ahead of the competition and the cyber attackers themselves.
In the worst-case scenario, if Darktrace does not invest enough, the company’s technology could be overwhelmed. This would almost certainly destroy the company’s reputation overnight.
The company is investing heavily to maintain its competitive advantage. That is why the group is still losing money, despite its rapid sales growth over the past few years.
I think this is a worthwhile trade-off. As the business grows, it should be able to raise prices and eventually, this could lead to profitability. However, in the meantime, management has to concentrate on reinforcing and developing the group’s niche and hold over its section of the market.
Darktrace share price outlook
Unfortunately, as long as the company remains loss-making, it will be difficult for me to place a value on the stock.
That being said, I can use the price-to-sales (P/S) metric, which is a better way of evaluating businesses that are not profitable. The Darktrace share price is currently selling at a P/S ratio of 13.5. City analysts think the company’s sales could rise to $513m (£380m) by 2023. Based on these estimates, the stock is selling at a 2023 P/E ratio of 7.3.
In comparison, US peer Cloudflare is selling at a 2020 P/S ratio of more than 100.
It is always going to be challenging to place an accurate five-year valuation on a stock. There are many reasons why the numbers may not turn out to be accurate as they are, after all, just estimates.
Still, I think these numbers illustrate Darktrace’s potential. They suggest to me that the stock could be worth substantially more in five years than it is today. As such, I am still happy to buy the stock for my portfolio as a growth investment.
Rupert Hargreaves 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.
This post was originally published on Motley Fool
