The Darktrace (LSE: DARK) share price was on an incredible upward trajectory for most of this year. But this week it crashed when industry analysts said that it was seriously overvalued. I feel I was right to avoid it before. But have I reconsidered the cybersecurity firm now that it has fallen in price?
What is Darktrace?
Darktrace is a Cambridge-based cybersecurity firm that went public earlier this year. It specialises in protecting business data using advanced artificial intelligence technology to adapt and learn from the growing number of cyber threats coming from all around the world.
Tech companies like Darktrace have the potential to be extremely profitable. Often, they employ relatively small numbers of highly skilled workers to provide high-demand services to millions of people. This is part of why Facebook is worth so much.
Darktrace’s business model is subscription-based, unlike Facebook’s, but such a model is among the most reliable on the market. It locks in customers for long periods of time to services they become reliant on.
Why did the price rise so fast before?
Darktrace’s share price shot up after going public. It was first floated at 250p then climbed all the way to 985p. This is because the first half 2021 looked excellent for the company. It managed to bring in $281m in revenue for the period, an increase of 41.3%.
But this increase was mitigated somewhat by a sharply wider net loss of $149.6m due to non-cash finance costs. Darktrace claims that these losses ceased at the IPO, when all loan notes were converted to equity.
Personally, I thought that most of the price action was driven by investor over-excitement. Everyone wants to be in on the next big thing in tech. Artificial intelligence are two words that have been thrown around a lot in tech circles for some time. We often hear about how AI and machine learning are already shaping our lives, but few of us fully understand what it is or how it works.
This was, initially, my main reason for staying away from Darktrace. I thought that we would see a price crash after early investors sold off their shares. It turns out I was wrong.
Should I buy the dip?
Darktrace has been an unusually volatile stock, both up and down. Even so, I’ll admit I was completely caught off guard by exactly how overvalued some analysts thought it was. One source put the share’s fair price at 330p!
Granted that’s just one analyst and it doesn’t mean the price will fall that low. In fact, Darktrace could well boom from here. But that 330p assessment is still a very far cry from the current price of 703p. I won’t be adding Darktrace to my portfolio.
James Reynolds 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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