The Darktrace (LSE: DARK) share price has had a wild couple of months. Gaining over 50%, then losing almost 20% in the month of September alone indicates to me that Darktrace is experiencing a lot of volatility. These large price movements have left me wondering: where will Darktrace shares go next?
What has been driving the volatility?
The Darktrace share price gained steadily for the first couple of months after its IPO in late April. Then, when the company reported a 41% increase in its revenues for the year, the share price exploded, more than doubling over the summer. More recently, however, the share price has suffered from the news that three large private equity firms have been selling their Darktrace holdings. KKR, Summit Partners and Balderton Capital were all investors before the IPO. Now that their lock-up period has ended, they’ve all decided to take profits. Clearly this news has scared markets, denting the Darktrace share price.
Is the price slump an overreaction?
It seems possible to me that the market could have oversold on this news. After all, these three private equity firms have watched their investment in Darktrace almost triple. It would not be unreasonable for them and other investors to take some profits, regardless of any upside potential that they may see for Darktrace.
As well as this, Darktrace investors may be able to find comfort in the fact that the cybersecurity industry, in which Darktrace operates, is growing rapidly. Hackers and other cyber criminals are becoming more and more sophisticated. Companies and governments are under increasing pressure to protect themselves from cyber-attacks. Losses due to cybercrime around the world have been estimated to reach well into the US$ trillion range in 2021 alone, a figure set to increase at a brisk rate over the next decade. Darktrace has found itself in the middle of this increasingly important industry, and with its pioneering AI technology, the company has lots of growth potential. It refers to this technology as a “digital immune system,” capable of halting in-progress cyber-attacks without disrupting regular business operations.
As Darktrace has reported a 45% increase in its customer base for the 12 months ending June 2021, it is probably safe to say that the company’s unique approach to cybersecurity is gaining market share. This is good news for the Darktrace share price.
Challenges
Despite its recent growth, Darktrace faces several important challenges. It may operate in a high growth industry, but there are many key competitors, eager to take customers from Darktrace. Competitors of note include Cisco Systems, Honeywell and Broadcom, all companies with a market cap of over £100 billion. These companies, among others, are likely to try using economies of scale, and other advantages to improve their cybersecurity systems as business models, thus threatening Darktrace’s market position. As well as this, if Darktrace’s technology has a significant or high-profile failure, it could destroy the company’s reputation. This could severely undermine consumer confidence, and send the share price spiralling down.
Although it is impossible to tell for certain where the Darktrace share price could go next, I remain optimistic for the future, and the shares are on my watch list.
Kevin Diamond 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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