When it comes to investing for growth, are Deliveroo (LSE: ROO) and its share price more attractive, or is cybersecurity group Darktrace (LSE: DARK) a better pick for me?
Side by side
Both technology companies have listed on the London Stock Exchange this year, in high-profile IPOs.
Both are loss-making so looking at traditional metrics such as price-to-earnings (P/E) ratios won’t do the trick. Comparing them side by side financially is tricky. As they’re loss-making what I want to see is strong revenue growth (which both have) and a path to profitability.
The trick is to concentrate on what the future holds for the companies. Here, from my perspective, Darktrace is the winner. Cybersecurity is a burgeoning industry and Darktrace has leading artificial intelligence technology. Spending on cybersecurity is increasingly important to companies because of GDPR legislation and large fines for data breaches. This suggests to me that there’s a path to profitability for Darktrace.
I feel Deliveroo’s main future growth potential comes from overseas expansion and moving into grocery delivery. It has continued to sign collaboration agreements with companies such as Amazon. The organisation’s also launched a new rapid grocery delivery service with Morrisons.
Darktrace saw revenue growth of 41.3% between 2020 and 2021. Deliveroo achieved growth of 82% comparing the first half for each of those years. While this isn’t a like-for-like comparison, Deliveroo does appear to be enjoying better revenue growth.
Challenges faced by both
There can be no doubt both companies face a lot of competition. Their markets are crowded and that could put pressure on margins. Deliveroo is having trouble expanding internationally and is pulling out of Spain. Delivering groceries doesn’t seem to me to be a high-value activity so would investors be prepared to pay a high price for the shares? I’m not so sure.
Darktrace’s share price may be held back by its association with Mike Lynch who may be extradited to the US for trial over fraud allegations. He’s a shareholder in the group, owning about 4.5% of the shares. Beyond that, the cybersecurity group faces challenges with long sales cycles. Its technology may also at any time be superseded and it could lose market share.
As far as the Deliveroo share price is concerned, the challenges are significant, I feel. But the risks to Darktrace shouldn’t be underplayed either.
My judgement
Despite the challenges, I believe Darktrace has the better technology, the stronger drivers for long-term growth and a clearer path to profitability. Its business model also creates more recurring revenue and requires less advertising spend to acquire customers.
That’s why, if I was choosing between Deliveroo or Darktrace, I’d go with the former. That said, I don’t want to buy yet. I may wait until it has been a listed company a little longer in case its previous backers start selling off their shares and push down the share price.
Andy Ross owns no share mentioned. The Motley Fool UK has recommended Deliveroo Holdings Plc. 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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