I was right about the Darktrace share price! Here’s what I’d do now

Whenever I’ve covered the Darktrace (LSE: DARK) share price in recent weeks, I’ve always tried to clarify that I considered the company undervalued compared to its potential. It looks to me as if the market’s now waking up to this fact. 

Following a trading update from the organisation released last week, shares in the cybersecurity group have risen in value by around 15%. Based on the corporation’s commentary, I think there are further gains to come. 

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Darktrace share price growth

According to the company’s most recent trading update, which covered the quarter to the end of September, the group’s customer base increased nearly 43% year-on-year. At the end of the month, annualised recurring revenue totalled $382m, up almost 46% year-on-year. 

Furthermore, quarterly revenues increased 51% compared to the same period in the previous year, suggesting Darktrace’s growth could be accelerating. 

I think these numbers support my belief that Darktrace is benefiting from the rising demand for cybersecurity services. It also seems as if new customer wins are helping to improve the company’s visibility. Clients won’t want to pay for a service without a strong reputation. With every day that passes, Darktrace is building a visible reputation. 

This is driving a virtuous cycle. As new customers arrive, the group’s recurring revenue grows. This provides more funding for marketing and increases the company’s visibility, which should only help its marketing efforts further. 

That said, I think it’s a bit unrealistic to assume that revenues will continue to grow at 40-50% every year for the foreseeable future. The cybersecurity market is highly competitive, and it’s only becoming more so. This is something I need to consider when evaluating the Darktrace share price. 

Still, Darktrace’s edge is its artificial intelligence technology, which helps identify threats before they can cause significant disruption. As long as the enterprise continues to invest heavily in making sure that its software is at the cutting edge of cybersecurity defence, I think it should continue to attract customers to its offer. 

Valuation potential

Considering all of the above, despite its recent performance, I think the Darktrace share price is still undervalued, compared to its international peers. 

With revenues growing at more than 40% a year, I think the stock deserves a high multiple. However, at the time of writing, the stock’s selling at a price-to-sales (P/S) multiple of 22. By comparison, its US peer Cloudflare is trading at a P/S ratio of 61. 

Of course, just because a stock is undervalued compared to a peer doesn’t mean it will outperform. Nevertheless, I think it shows the scale of the opportunity here. 

That’s why I’d still buy the stock from my portfolio, despite its recent positive performance. I think the Darktrace share price has plenty of room left to run. 

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

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