So far in 2021, there have been many lessons to learn from initial public offerings (IPOs). I wrote about several of them here. The unpredictability and volatility can be difficult for retail investors like myself to deal with. Darktrace (LSE:DARK) is the latest high profile IPO to hit the market. After the Darktrace share price rallied 40% in the initial period of trading, I could be getting ready to buy in when it becomes available for retail participants. But what’s the real story here?
What’s Darktrace?
Darktrace is a cyber security firm based in the UK. It was only formed in 2013, and has gone from zero to IPO status in less than a decade. The back story is also very compelling, given that it was formed as a partnership between Oxbridge mathematicians and British Intelligence.
The main service provided is an artificial intelligence system that detects and deals with cyber security attacks. This is known as the Enterprise Immune System.Â
It all sounds very high tech and smart from my point of view. But what about the potential to make money as an investor? Over the years it has sourced funding from hedge funds and capital partners. In these cases, the valuation of the company was growing. So when it came for the IPO, the target was to set the initial Darktrace share price at a level that reflected a valuation of around £3bn.
With rumours that large investors weren’t onboard, the price was cut last minute to float at 250p, reflecting a value of just £1.7bn. The disastrous float of Deliveroo only a month ago was likely still on the management team’s mind.
So although the Darktrace share price did take a large bounce higher when the market opened, it bounced from a cut price value. This is something I need to remember.
My outlook for the Darktrace share price
From a financial point of view, I can’t see much information that will help me right now. I know that revenues grew by 45% in the last financial year, but Darktrace is still loss-making. Therefore, I look forward to getting more information from trading updates in the next few months when it has to disclose them to the market.
I think the outlook is positive for the Darktrace share price if I believe the £3bn was justified. The cut in price may have been simply to avoid the bad press around a flop. From that angle, a £3bn valuation would put the fair value of shares around 440p. Even from the current levels around 350p, there is still good upside potential.
On the downside, I need to watch out for potential reputational damage from one of the founding investors. Mike Lynch is contesting extradition to the US over fraud charges. If this gets messy then it could tarnish the brand of Darktrace and ultimately hamper the share price.
Ultimately, I can’t invest right now anyway as retail investors have to wait for shares to trade unconditionally. Even with this, I’m very happy to sit on the sideline for the moment and see how the first couple of weeks play out before looking to make a decision.Â