Should I buy Darktrace shares?

Darktrace (LSE: DARK) shares are up 40% since the company’s initial public offering (IPO) on 30 April 2021. The British cybersecurity company priced its shares at 250p, valuing the firm at £1.7bn. It was able to raise £165m from the IPO. 

I want to analyse the company to understand if this is the right stock for my portfolio.

Darktrace company’s fundamentals

Darktrace’s revenue growth has been extraordinary. For the fiscal year 2020, revenue grew by 45% to $199.1m. It grew by 73% to £137m in 2019. However, the company is loss-making. This is common for high-growth technology companies, as they have to invest in new products and marketing in the initial stages. Darktrace’s losses have reduced from $42.5m in 2018 to $28.7m in 2020.

The company has over 4,700 customers from over 100 countries. This means it has a geographically diversified client base, which is good as any slowdown in a particular region might be offset by growth in another. It generated 18% of its first-half of fiscal year 2021 billings from the UK. Europe, excluding the UK, accounted for 21%, while the US and Canada generated 39%, and the rest of the world, 22%. Management expects to continue to grow globally in the future, with a strong presence and market success in these regions.

Risks to consider in investing in Darktrace shares

Some of the risks to investing in Darktrace include competition in the technology sector. Companies have to invest a lot of money in marketing and new product development. Products become obsolete very fast, and if any company fails to meet the rapid changes of the customer needs, they will lose market share.

Next, the company has incurred losses since its inception. If the company fails to achieve profits, then Darktrace shares might be less valuable in the future.

The company has mentioned that the group might face potential liability arising from alleged unlawful activities by one of its founding investors, Mike Lynch, in connection with the sale of his company, Autonomy, to Hewlett-Packard. Reports suggest that this was one of the reasons for the IPO’s valuation being reduced. 

Valuation

The company is trading at about 18 times fiscal year 2020 sales. Darktrace’s valuation is lower than its US-listed competitors, CrowdStrike, which is trading at around 51 times sales, and Okta, around 32 times sales. I believe there are some good reasons why these stocks are trading at much higher valuations. First, the demand for technology stocks in the US is robust. Second, CrowdStrike’s fiscal year 2021 revenue grew by 82% to $874.4m, and Okta’s grew by 43% to $835.4m.

For a closer comparison to Darktrace, we could look at SentinelOne, the latest cybersecurity company to file its prospectus for an IPO in the US. Reports suggest that the company is eyeing a $10bn valuation, but the actual figure might differ. Its fiscal year 2021 revenue grew by 100% to $93.1m. However, its losses increased from $76.6m to $117.6m in 2021. So, even though I discount the better revenue growth, I believe Darktrace has a better valuation.

I also like Darktrace’s strong growth. However, I would like to keep the stock on my watchlist, as it is recently listed. In addition, I want to review the company’s results in the coming months. This means I am not a buyer of Darktrace shares today.