Key points
- Revenue has risen by 50% per year since 2018
- Darktrace is performing better than expected since IPO
- Metaverse growth likely to increase demand for advanced cybersecurity services
- DARK’s AI technology appears to offer services not available elsewhere
The Darktrace (LSE: DARK) share price has fallen by over 50% since October. I think this sell-off may have gone too far. Although I’m normally cautious about investing in loss-making tech stocks, I’m excited about the growth potential of this Cambridge-based firm.
Huge growth potential
One key thing I look for with new tech stocks is a strong growth rate. These businesses often look expensive when they’re still growing, but profits can rise very quickly once they reach a certain size.
Darktrace has generated average revenue growth of 50% per year since 2018. The company appears to be on track to maintain that impressive record this year.
Revenue rose by 50% during the six months to 31 December, compared to the same period in 2020. Customer numbers were up by nearly 40% during the half year, while all-important recurring revenue rose by 45%.
I love to see recurring revenue in a tech business, because it often means that customers will become hooked on the service and will continue to renew their subscriptions for many years.
Are Darktrace shares a sure thing?
Fast-growing tech stocks always carry some risks. One obvious concern is that Darktrace shares remain expensive by normal metrics. At around 415p, the stock is priced at seven times forecast revenue for 2021/22. Analysts expect Darktrace to report a loss for the 2022 and 2023 financial years. If growth stalls, I’d expect the stock to crash.
The company’s historic association with tech entrepreneur Mike Lynch is also a niggling concern. Mr Lynch is currently fighting extradition to the US on fraud charges relating to a previous business.
However, he’s no longer thought to have any involvement with Darktrace, except as a shareholder.
In the meantime, I believe that the market for the firm’s services is about to get much bigger.
Why I think demand could explode (hint: the metaverse)
The last few years have seen an explosion in cyber crime, such as ransom attacks and data theft. I think it’s fair to say that many companies are only just beginning to understand how serious the risks are to their business (and to their bank accounts).
Most businesses currently rely on traditional cybersecurity products. These compare online threats to a known set of rules. They work well — up to a point. But I think there’s likely to be strong demand for more intelligent services that can understand all network activity and learn to recognise potential threats. This AI-based functionality is at the heart of Darktrace’s offering.
Over the next few years, I expect many organisations will start using AI-based systems like Darktrace alongside conventional systems, for maximum protection. Meanwhile, the growth of the metaverse is likely to see even more of our business and personal data move online.
I think that demand for advanced cybersecurity products will only increase from now on.
If I’m right and Darktrace can continue to deliver on its growth forecasts, then I think the share price could perform strongly in 2022 and beyond. I’m considering Darktrace as a speculative buy for my portfolio.