The Darktrace (LSE: DARK) share price has sunk in recent months, falling from its highs of 950p to its current price of just under 500p. It’s still higher than its April debut price of 330p, and today, the shares have soared around 20% due to news of strong annual revenue growth and a guidance upgrade. So, is it now the perfect opportunity to invest in the shares or are they still too expensive?
What has caused the recent decline?
The company’s share price decline started at the end of October for a few main reasons. Firstly, Peel Hunt issued a broker note stating that, at over 900p, the shares were severely overpriced. It also described Darktrace’s product, which uses artificial intelligence to thwart cyber-attacks, as a “gimmick”. Peel Hunt gave Darktrace a price target of 473p. Of course, this is slightly above the current share price however, implying that after the recent drop, it may have upside potential.
Investors were also spooked by the number of investors who sold shares after the lock-up period (which prevents investors from selling shares until 180 days after the IPO) ended. This included major investors such as Deep Defence, which sold a third of its holdings, and Summit Partners and KKR. Such widespread selling led to investor confidence decreasing further.
As such, since the end of October, the shares have been on a downward spiral. Issues such as inflation and the general sell-off of technology stocks have potentially contributed to this.
What about the future?
So far, much seems negative about Darktrace. But the company is still performing well. In fact, in its full-year 2021, the firm managed to increase revenues over 40% year-on-year to $281m. Adjusted EBITDA also reached nearly $30m, a 233% year-on-year rise. The company is still loss-making however, reporting a net loss of around $150m. This was mainly due to costs associated with the IPO.
Today also saw an announcement that revenue growth is expected to be around 43% for the next financial year, which is extremely positive. Indeed, this is up from previous estimations of around 38%. It would also take revenues up to well over $400m. This is a sign of excellent growth and a clear reason why the Darktrace share price soared around 20% in early morning trading.
In recent months, the company has also been able to attract more clients. This includes a lucrative deal with an unnamed European automotive giant and another deal with the building and civil engineering company, Sir Robert McAlpine. That firm said that Darktrace’s AI technology stops around 18,000 email attacks each month. This provides evidence that the technology is not just a “gimmick” and is a compelling reason for me to buy the shares.
Can the Darktrace share price continue to rise?
In the past, I’ve always avoided Darktrace due to its lofty valuation. But if it can achieve its forecast revenues for the next financial year, the Darktrace share price will have a forward price-to-sales ratio of under 10. While this is not bargain territory, it is certainly far more reasonable than before. As such, considering the excellent growth prospects of the firm, and the fact that cyber-security is a largely growing industry, I think today’s rise may just be the start of a major recovery. I’m very tempted to buy.