The Darktrace (LSE: DARK) share price has been on a hell of a bumpy ride, so far. Since its IPO in late April, the business — which supplies software to help fight the growing threat of cybercrime — has risen an impressive 245% in value.
But trading has often been choppy and it recently toppled from September’s record closing peaks of 985p on news of heavy selling by major investors. Darktrace’s share price was last sitting at 865p.
Is the UK tech share too cheap to miss at these levels?
The bull case
There are several good reasons why I think the Darktrace share price could begin to sprint higher again. These include:
- Trading levels are beating all expectations. Demand for Darktrace’s software is confounding even the company’s confident forecasts. Last month, the business hiked its forecasts for the new fiscal year (ending September 2022) for the second time in as many months.
- Cybersecurity tipped for jaw–dropping growth. The rate at which the cybersecurity industry is growing leaves the possibility of more share-boosting upgrades in the weeks, months and years ahead too. Analysts at Statista think the sector will be worth $345.4bn by 2026, up significantly from an estimated $271.9bn in 2021.
- It uses artificial intelligence to combat attacks. Darktrace uses an AI-based approach which it says “learns normal ‘patterns of life’ to discover unpredictable cyber-threats.” Using a system that observes users’ habits removes the problem of cumbersome updates, giving Darktrace a significant advantage in the market.
- Darktrace’s improving balance sheet. I’m also encouraged by the recent improvement in Darktrace’s cash flows, which should help it finance its growth strategy. Cash flow from operating activities soared 209% year-on-year in financial 2021, to $59.9m.
The verdict on Darktrace’s share price
City analysts think Darktrace’s revenues will balloon as the 2020s roll on. Top-line rises of 36% and 33% are forecasted for financial 2022 and 2023 alone. However, the number crunchers don’t think Darktrace will break into profit until some time in the latter half of the decade.
This creates the danger that it may it have to dig into cash reserves, or raise finance to invest for growth. What’s more, the Darktrace share price could slump if it takes longer than the market expects to move into profit.
Which brings me onto my next point. The business of cybsersecurity is highly competitive and Darktrace is up against some mighty rivals like US giants Microsoft and McAfee.
These rivals have much more financial clout and brand recognition than this particular UK share. Despite its unique AI-geared model, there’s a danger Darktrace may fall behind its rivals. Revenues growth could disappoint and the costs it incurs to compete might spike.
There are clearly risks to the Darktrace share price in the near term and beyond. But following recent falls, I’m tempted to invest in the IT specialist. The booming cybersecurity market offers a world of opportunity for investors like me to make cash. And I’m highly encouraged by the impressive rate at which this relatively new business is winning customers.
Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Microsoft. 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
