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Airtel Africa 

What it does: Airtel Africa provides telecommunications and mobile money services in 14 African countries. 

By Royston Wild. Airtel Africa’s (LSE: AAF) share price has slumped in recent weeks. I’d use this as an opportunity to buy a top growth stock at a discount. 

Today the telecoms business trades on a forward price-to-earnings (P/E) ratio of 6.5 times. This is far below what, say, FTSE 100 rival Vodafone trades on (the earnings multiple here sits at 10.8 times).

City analysts think Airtel’s annual earnings will rise 12% in this financial year. They are tipped to increase 11% next year, too. 

I’d buy the business to capitalise on soaring demand for telecoms and financial services products in Africa. It is the second-largest telecoms provider on the continent, and has been growing revenues and earnings by double-digit percentages for the past 17 quarters. 

Product penetration across Airtel’s portfolio remains quite low. Meanwhile, personal wealth levels in its markets are increasing sharply. I think this perfect blend should deliver excellent long-term earnings growth at the company. 

Royston Wild does not own shares in Airtel Africa. 

Somero Enterprises

What it does: Somero Enterprises designs and sells concrete levelling equipment used by construction companies worldwide.

By Zaven Boyrazian. Somero Enterprises (LSE:SOM) is a designer and manufacturer of laser-guided concrete-laying screed machines. It’s hardly the most exciting business out there, but it plays a pivotal role in the US construction industry.

With the American congress recently passing a $1trn infrastructure investment bill, management has had little trouble finding customers for its products. So, it’s hardly surprising that the group recently hit record revenues.

Despite this, Somero shares have tumbled more than 20% over the last 12 months. It seems investors are getting increasingly agitated about supply chain disruptions, which are having a significant impact on its non-US operations.

However, while frustrating, this is ultimately a short-term problem. And seeing a solid high-growth company trading at a P/E ratio of 7.3 looks too cheap in my eyes. That’s why I’m tempted to bolster my existing position by buying more at today’s stock price.

Zaven Boyrazian owns shares in Somero Enterprises.

Chemring Group

What it does: Chemring Group designs, develops, and manufactures advanced technologies for the defence industry.

By Charlie Carman. China’s rise and the Russo-Ukrainian war have boosted demand for products developed by Chemring Group (LSE: CHG). Defence budgets are expected to increase across its four home markets: the UK, the US, Norway, and Australia.

The group’s order book reached £678m in September, covering expected full-year 2022 revenues. New contracts with NATO members for the company’s countermeasures and energetics business indicate a robust manufacturing pipeline for 2023 and beyond.

Chemring’s other main arm focused on sensors and information also looks healthy. In H1 2022, this division generated 21% revenue growth and a 27% hike in operating profit.

Granted, net debt is currently £18.5m, which could limit future growth prospects. However, a 52% reduction in this figure since H1 2021 shows a positive trajectory.

In my view, significant barriers to entry in the sector contribute to the defence stock’s long-term potential, provided it remains at the forefront of developing state-of-the-art technologies.

Charlie Carman does not own shares in Chemring Group. 

Darktrace

What it does: Darktrace is a cybersecurity company, and uses AI to develop autonomous detection of cyber threats.

By Alan Oscroft. A couple of brokers have price targets on Darktrace (LSE: DARK) of around twice the current share price. I’d never buy the stock based on that, but it’s inspired me to re-examine the company.

The shares got a little overheated last year, but then crashed after some negative reports. Over 12 months, Darktrace shares have now lost around 60% of their value.

Darktrace recently reported a 46% rise in full-year revenue, with a small net profit of $1.5m. It also confirmed 2023 guidance for a 31-34% increase in annual recurring revenue. Predicted adjusted EBITDA margin is in the 15-18% range.

The company has since reported a 29% year-on-year increase in net new customers in its first quarter, reiterating its full-year guidance.

We’re looking at a forecast P/E multiple of 130 as far out as 2024. So there’s definitely valuation risk there. But I think it could be the start of sustainable growth.

Alan Oscroft does not own Darktrace shares.

Marks and Spencer

What it does: M&S is one of the UK’s biggest retailers. It specialises in selling clothing, beauty, home products, and food products. 

By John Choong. Marks and Spencer (LSE: MKS) shares are currently trading at a P/E ratio of 7. Despite the grocery industry being known for its low margins, I think M&S could be an exception and be an excellent growth stock for the long term.

It’s no secret that Marks and Spencer’s products are priced on the higher side. Therefore, it may seem contradictive to buy its stock when consumers are ‘down trading’. However, I believe that the retailer’s target market (middle and upper class) isn’t necessarily trading down in groceries. Instead, they’re trading down in eating out, and choosing to seek value in purchasing M&S’ great-tasting packaged meals. After all, Tesco indicated this trend in consumer behaviour.

With the grocer’s latest cost-savings plan and exciting lines of clothing to be launched, I think the company’s top and bottom lines should benefit over the long term as it continues to fulfil its growth plans. As such, I think M&S shares have the potential to head higher from their current levels.

John Choong has positions in Marks and Spencer.

Safestore

What it does: Safestore is a leading supplier of self-storage services in the UK and continental Europe

By Christopher Ruane. The Safestore (LSE: SAFE) share price over the past year might not suggest a compelling growth story. The shares are down 25% in 12 months.

But I think that offers an attractive buying opportunity for me to increase my stake and would consider doing so if I had spare money to invest.

In the most recent quarter, revenue grew 15% compared to the same period last year. That is part of a pattern of long-term growth I expect to continue. Self-storage continues to see growing demand in the UK. Safestore’s well-established brand can help it benefit from that. The company is developing a pipeline of new properties equivalent to around 14% of its current floor space.

A worsening economy could lead some tenants to try and cut their costs by reducing storage space. That might hurt profits. But I am upbeat about the company’s prospects and see strong growth opportunities ahead.

Christopher Ruane owns shares in Safestore.

Rightmove

What it does: Rightmove is the UK’s most popular property portal, providing advertising services to new home developers and estate agents.

By Paul Summers: Shares in property site Rightmove (LSE: RMV) have tumbled nearly 40% in 2022 as investors have become increasingly skittish over the impact of higher interest rates on the UK housing market. I regard this as an opportunity.

At face value, a P/E ratio of 21 doesn’t seem like a bargain. However, it’s far less than the five-year average of 32. This presents as an even better deal when Rightmove’s massive market share, healthy financial position, and staggeringly high margins are taken into account. 

A recovery won’t happen overnight and things could easily get worse for the stock depending on what the Bank of England decides to do about rates in early November. But it does feel like a lot of fear is already priced in.

And let’s not forget that Rightmove makes money even if the properties it lists fail to attract buyers or renters.

Paul Summers has no position in Rightmove.

Rightmove

What it does: Rightmove makes money by listing estate agents on its website and selling additional advertising products.

By Stephen Wright. My Best British growth stock to buy in November is Rightmove (LSE:RMV). I think that now could be a terrific time to add to my investment in this stock.

Right now, the UK property market is under pressure. Rising interest rates have been making mortgages more expensive and slowing down the demand for housing. 

As a result, shares in Rightmove have fallen by around 37% since the start of the year. But I’m seeing this as an opportunity. 

The company has a dominant position in an industry that typically has high margins and it generates significant amounts of cash. There might be some turbulence in the near future, but I think that the business will do well as the economy recovers.

Furthermore, the company has been buying back its own stock over the last few months. To me, this indicates that management also sees the stock as undervalued.

Stephen Wright owns shares in Rightmove.

Diageo

What it does: Diageo is a global leader in alcoholic beverages with products sold in more than 180 countries.

By Ben McPoland. Diageo (LSE: DGE) has been firing on all cylinders for many years. The British drinks giant has a portfolio of over 200 brands, including Guinness, Johnnie Walker and Baileys.

The share price is down this year, though, with the looming possibility of a global recession. Consumers, however, don’t tend to give up their favourite tipple, even during economic downturns. They are unlikely to switch from something like Johnnie Walker (the world’s most popular Scotch whisky) to a cheaper alternative. People basically put these drinks into the “affordable luxury” category.

This consumer loyalty to Diageo’s brands gives it a powerful competitive edge. And, due to its wide global presence, the company stands to benefit as disposable incomes rise in regions like Asia and Latin America.

The shares trade at a P/E ratio of 24, which isn’t particularly cheap. But I think the premium price is warranted for Diageo.

Ben McPoland owns shares of Diageo. 

Let’s explore.

One-year return

The rapid growth and subsequent decline in the Darktrace share price is a remarkable story.

A year ago, the FTSE 250 stock was trading near its all-time high at £9.12 per share after making a stock market debut less than six months earlier. The Cambridge-based company was buoyed by excitement surrounding its AI technology designed to protect critical national infrastructure and global corporations from cyber-attacks.

It’s since plummeted 63% to £3.38 today. The fall was driven by multiple factors including broker downgrades, a recent collapse in takeover discussions with US private equity firm Thoma Bravo Advantage, and fraud accusations levelled against the company’s former adviser Mike Lynch.

To illustrate the point, in October 2021 I’d have been able to buy 109 Darktrace shares for a total of £994.08. Today, my shareholdings would have shrunk in value to £368.42, with no dividends to soften the blow.

By contrast, £5.92 in leftover cash from my initial £1,000 investment would still be enough to buy a pint of beer!

Investing lessons

Two lessons from this saga stand out to me.

The first is understanding stock market volatility. Fluctuations in share prices are often more pronounced in growth stocks, such as Darktrace. While there are sometimes great bargains to be found when equities are oversold, positive returns are far from guaranteed.

This leads me to the next valuable lesson — the Foolish investing approach. In my view, adopting a long-term investing horizon spanning many years (ideally decades) is the best way for me to ride out volatility and maximise my chances of making money.

Where next for Darktrace shares?

Today, Darktrace is in a very different position than it was a year ago. The stock’s currently hovering above the £3.30 level where it finished its first day of trading in April 2021.

On the face of it, the current valuation improves the risk/reward profile for me. I can find several reasons to be bullish. The FY22 results showed strength across a number of financial metrics. Other key highlights included a 28.7% uptick in employee headcount to breach the 2,000 barrier. The business also achieved impressive 290% growth in its free cash flow, which is now just below $100m.

Nonetheless, unresolved legal troubles engulfing Mike Lynch complicate the picture and add uncertainty to the outlook for Darktrace shares. The company also isn’t immune to broader economic headwinds. It acknowledges spiralling inflation affects “recruitment and retention of staff” due to “pressures on salaries and costs within the business”.

Would I buy?

At today’s price, I’m tempted to enter a position. However, in this febrile investing environment, I’d prefer to invest in companies with established track records of surviving recessions. After all, Darktrace is less than a decade old. I won’t be buying today.

Is this an opportunity to pick up one of the UK’s most exciting tech stocks for my portfolio at a great price? Or is this a growth stock to pass on? Let’s take a look.

Darktrace shares: is now the time to buy?

There are certainly things to like about Darktrace from an investment point of view. For starters, it operates in a high-growth industry. According to data and analytics company GlobalData, global cybersecurity revenue is expected to rise from $220bn in 2021 to $334bn in 2026.

At the same time, it operates in quite a ‘defensive’ industry. In a recession, companies can potentially cut back on things like marketing and advertising. They can also cut back on general technology spending. However, they can’t afford to cut back on cybersecurity spending. The risks are just too great.

This combination of growth and defence should provide strong tailwinds for companies that operate within the industry in the years ahead. It’s worth noting that this financial year (ending 30 June 2023), analysts expect Darktrace’s revenues to increase 35% to $562m.

Another thing I like here is that Darktrace is forecast to generate a profit this financial year. Currently, analysts expect net profit to come in at $28.2m. This is important, as profits should bring some stability to the share price. In the current environment, investors don’t have a lot of time for companies that aren’t making any money.

Risks

I need to weigh up risk versus reward however, and in this case there are some big risks to think about. Let’s start with the valuation. Currently, analysts expect Darktrace to generate earnings per share of $3.43 this year.

This means that at the current share price, the forward-looking P/E ratio is near 90. That’s high. This adds a lot of risk to the investment case. If future results are below expectations, the stock could experience a sharp fall, given its high valuation.

There’s also the level of competition Darktrace faces. The cybersecurity industry is highly competitive and Darktrace is going to have its work cut out to acquire and retain customers. It’s up against some big players, including the likes of CrowdStrike and Palo Alto Networks. Analysts at JPMorgan believe the company will need to make significant investments to remain competitive.

Finally, there’s still uncertainty over major shareholder Mike Lynch, who faces US extradition over fraud charges. He may have to dump a lot of Darktrace stock if he’s handed a large fine by American authorities. This could put pressure on the share price.

My move now

Weighing this all up, I’m happy to leave Darktrace shares on my watchlist for now. All things considered, I think there are better growth stocks to buy for my portfolio today.

Well, I do think growth shares still face short-term risk. And I reckon some falls, in part, represent long overdue price corrections. But I have my eye on a few growth prospects this month.

Buy Nasdaq?

When I think growth shares, the US Nasdaq index comes to mind. That index has slumped from a high of 16,212 in November 2021 to 10,575 as I write. That’s a whopping 35%. But how can we take advantage?

The clear choice for me is Scottish Mortgage Investment Trust (LSE: SMT). Scottish Mortgage shares have crashed by an even bigger 52% over the same timescale.

Falling further than the US technology index, the investment trust is now on a discount to net asset value of 12.4%. That means we can buy Scottish Mortgage shares for that much less than the value of the investments it holds.

The top 10 holdings currently include Moderna, Tesla, Amazon, and NIO among other popular Nasdaq and worldwide technology stocks. There’s clearly a risk of further short-term falls. But I think Scottish Mortgage is an attractive way to invest in a basket of global growth stocks.

Cybersecurity

I’ve been intrigued by cybersecurity specialist Darktrace (LSE: DARK) ever since it crossed my radar.

Darktrace hit the headlines and soared. But it looked very much like a hot growth stock that was overhyped and overvalued. Some short sellers took note and joined the party, and a number of analysts were very critical.

But moving forward to today, we see a 70% share price fall since last year’s peak. And the short sellers are gone. Darktrace shares did jump briefly in August when a possible offer for the company emerged. But that came to nothing and the price fell back again.

Would I buy now? I really don’t know. The company is only just into profitability, and financial ratios don’t mean much now. Forecasts, for example, put the shares on a price-to-earnings (P/E) multiple of over 110.

Revenue growth looks strong, and I am tempted. But I’ll probably wait until I can convince myself that profit is sustainable.

Engineering

I’ve watched Melrose Industries (LSE: MRO) on and off quite a lot over the years, but have never bought.

Melrose buys up struggling engineering firms, turns them around, and then sells them. But engineering is not the most in-favour sector with UK investors at the best of times.

And after the latest stock market downturn, the Melrose share price has now fallen 40% in 12 months.

Due to the nature of the business, with long cycles between acquisitions and disposals, year-on-year earnings can be erratic. And analysts don’t expect another annual profit until 2024.

But we’re looking at a price-to-book ratio of only around 0.6 now, valuing the company at just 60% of its assets. But there is a good bit of risk in going for engineering investments when facing the possibility of a painful recession.

Does that make them an attractively priced bargain for my portfolio?

No deal

In fact, although Darktrace shares have tumbled this week, they are basically now just back to where they stood last month. That was before the firm revealed that it had received a number of unsolicited, preliminary and conditional proposals from a potential bidder. It was announced this week that that suitor is no longer interested in pursuing the deal, leading to the shares tumbling.

Positive underlying business trends

But if a potential bidder decided not to buy Darktrace, should I?

I think the investment case for the company was strengthened by the strong full-year results it published this week. Revenue grew 46% compared to the prior year. Net profit was $1.5m. That may sound slight, but was a welcome turnaround from the $145.8m net loss the firm recorded last year.

Free cash flow also jumped. It nearly quadrupled, coming in at $99.5m for the 12 months. I think that shows some of the long-term cash generation potential the firm has.

These positive trends in Darktrace’s business performance suggest that it has the wind in its sails. I expect further strong growth in years to come.

Are Darktrace shares good value?

Still, does that merit the current valuation attached to Darktrace shares?

After all, even after Darktrace shares declined, the company still commands a market capitalisation of £2.7bn. For a company that made a net profit of around £1.3m in its most recent full year, that implies a price-to-earnings ratio of several thousand! That is incredibly high. Admittedly, the company could see earnings grow sharply in coming years, in which case the ratio may come down to more attractive levels. For now, though, it looks expensive to me.

I think the shares seem costly even if the business does well. They look priced for perfection, but in reality growing companies in fairly new industries can often run into unforeseen challenges.

I also remain unconvinced about the sustainability of Darktrace’s competitive advantage. An installed customer base should be of some help as the company seeks to consolidate its success so far. But I see barriers to entry in the fast-growing cybersecurity space as fairly low. I do not know whether Darktrace will be able to maintain its impressive rates of growth in the long term.

My move

On that basis, I definitely do not see Darktrace shares at their current price as a steal for my portfolio. In fact I think the company may struggle even to maintain its current valuation, especially if customer growth or profits come in below expectations. For now, like the prospective suitor although on a much smaller scale, I will be walking away from the opportunity to put my money into Darktrace.

Alongside this surprise news, Darktrace reported its first annual profit and confirmed previous growth forecasts for the 2022/23 financial year.

Thursday’s slump is a painful blow for buyers who’ve held the shares over the last 12 months. But with the company now in profit, I’m wondering if Darktrace shares could offer a buying opportunity at current levels.

A painful loss: what next?

Let’s get the bad news out of the way first. One year ago, Darktrace shares were trading at about 725p. As I write, they’re hovering around the 335p level — a fall of 54%.

This drop means that a £1,000 investment in Darktrace stock one year ago would be worth just £460 today.

Most long-term investors have been in this position at some point. I certainly have. An investment hasn’t worked out as I’d hoped, and I have to make a decision. Should I continue holding, or should I sell to protect myself against the risk of further losses?

The approach I normally take is to take a fresh view on the business. Does the investment story still make sense to me? And is the stock’s valuation reasonable, or does it seem too expensive?

Making progress

As a potential investor, I’d only buy Darktrace shares now if I thought the company’s performance and its valuation both justified a bullish view.

Today’s results cover the year to 30 June and do appear to show some progress. Darktrace’s revenue rose by 45.7% to $415m last year, generating a pre-tax profit of $5.3m.

The company says that it saw good sales growth last year. Customer numbers rose by 1,808 to 7,437, while the outstanding value of live contracts rose from $763m to $1,004m.

This increase was driven by a 7.9% increase in the average annual recurring revenue (ARR) from each customer. New contract ARR rose by 13%.

These numbers tell me that Darktrace has been signing up more customers at higher prices than previously. The company may also be selling more services to its customers than in past years. Good news.

Darktrace shares: my view

Unfortunately, it’s not all good news. Darktrace continues to face reputational problems. The company’s founder, billionaire Mike Lynch, is currently fighting extradition to the US on fraud charges relating to his previous business.

Short sellers targeting Darktrace also suggest that the firm has an aggressive sales culture and have questioned why Darktrace appears to spend less on research and development than some rivals.

Despite these concerns, I think Darktrace has some attractions as a potential tech investment. However, I’m not convinced the shares offer good value at current levels.

My sums suggest that even after Thursday’s slump, Darktrace shares are trading on a whopping 90 times 2023 forecast earnings.

Given the question marks surrounding this business, that’s too much for me. I’m going to continue watching Darktrace from the side-lines, but I won’t be buying the shares at current levels.

Yet over the last 12 months, Darktrace’s share price actually fell by 4%. The cybersecurity provider saw tremendous increases in total losses and financing costs during FY21. This scared some investors away.

I remain bullish however. The company’s most recent Q4 report demonstrated concrete growth — and its prospects for FY23 seem strong. But what exactly will happen to Darktrace remains to be seen as the potential for a buyout looms. Let’s take a closer look.

Cybersecure and industry safe

Investment in technology stocks remains at the forefront of many investors’ strategies. With the cybersecurity company showing strong growth within the tech industry, I’m increasingly confident about Darktrace’s prospects.

A £40m acquisition of Cybersprint in February indicates the company is expanding its industry presence. Yet while management claims this acquisition will accelerate the capabilities of its Cyber AI Research Centre, I’m worried this will overburden it financially. That’s particularly so as Darktrace suffered an increase in total losses from £24m to £124m across FY20-21.

However, the expansion does come at an excellent time. CEO Poppy Gustafsson said: “Against a turbulent geopolitical background, it’s no surprise that long-term cyber risk is an even higher priority“. Gustafsson isn’t wrong. Continuing conflict between Russia and Ukraine has raised safety concerns for businesses across Europe and the US. With a 42% increase in global cyber attacks, attention has turned toward companies such as Darktrace.

While total losses are cause for concern, I think the acquisition will benefit Darktrace over the long term. At a time when industry demand is rising, the company seems well-positioned to capitalise on expansion and to drive forward its performance.

Looking forward

Awarded TIME magazine’s ‘Most Influential Company’ title for 2021, Darktrace has undeniably made an impact. But where exactly is the company headed?

It’s currently developing its Prevent family product, while its Attack Surface Management and End-to-End products were released at the beginning of this month. However, this was achieved only through an alarmingly-high increase in borrowing costs, rising from £2m to £90m from FY20-21.

Yet the Q4 results demonstrated that progress is being made. Total customers rose 32% to 7,400. As a result, Darktrace boasted a 47% increase in revenues, now sitting at £346m. With further products set to release, that progress could continue.

Also, Thomas Bravo’s takeover decision, with a deadline of 12 September, should have a significant impact on the share price. With FY22 results due on 8 September, this will be a manic few days for the Darktrace share price.

I’m usually averse to such volatility. However, I think the company has performed well this year. Its presence in the industry has expanded considerably. Also, its product development and sales strategy is bearing fruit. With notable growth prospects, I’ll be looking to add Darktrace shares to my portfolio now to hold for the long term. I just need to be prepared for a potentially rough next month if the buyout unfolds.

Takeover speculation

Let’s address the most recent jump this week. The share price popped 20% early Tuesday following confirmation from Darktrace that private equity firm Thomas Bravo is interested. It said that “discussions are at a preliminary stage and there can be no certainty that any offer will be made, nor as to the terms of any such offer”.

This statement wasn’t enough to put any kind of dampener on the share price for the rest of this week. Nobody knows if a formal offer will be made. More importantly, no one knows what the price might be. But considering that the high of the year is still almost double the current price, investors are clearly betting that the value will be higher than what the company is trading at.

I never find it a smart move to buy and sell based on takeover potential. It’s very speculative and short-term as a strategy, whereas my aim is more long-term and focused on fundamentals.

Better-than-expected results

Late last month, Darktrace released a trading update for the full year. It noted year-on-year expected revenue growth of at least 48%. I do admit that the top line sales growth is impressive over the past couple of years. Ultimately, this hasn’t so far resulted in a profit, but it’s moving in the right direciton.

The company also reported adding 500 net new customers, which grows the base by 32% versus last year. With other points talking about a brand refresh and the launch of a new cyber security AI product family known as PREVENT, the report read well overall.

From this, the share price lifted. It has also managed to hold on to these initial gains from results day and carry them forward in August.

Tech sector helping the Darktrace share price

Finally, I think that the move higher in the past month reflects the broader rally in the tech sector. The NASDAQ index (which houses the largest tech stocks in the world) has jumped 12% in the past month. I know this doesn’t match the 61% rise in Darktrace, but this is the overall index. Within it, some tech names have experienced larger moves higher.

The tech sector is very sensitive to the state of the broader global economy, as most are growth stocks that need consumer spending and heavy investment to propel the business forward.

Whether this rally is sustainable or not for the rest of the year is unclear, but in the short term it’s certainly helping this area outperform.

Is the cybersecurity technology stock at the start of a new bull run? Today, I’m looking at a few things that I think could send the price up further.

Results

Firstly, full-year results should be with us on 8 September. If they’re as good as the firm’s July trading update suggest, I think we could see a healthy share price boost.

Darktrace expects to report a 32% rise in customer numbers over the previous year, and a 48% increase in revenue. It also reckons there’s an adjusted EBITDA margin of at least 19.5% on the cards. And it expects free cash flow of around 95% of adjusted EBITDA.

That all sounds good, but when it comes to bottom-line pre-tax profits and earnings per share, all we’ve seen so far are negative numbers.

I want to see how that situation is developing. The year to June 2021 brought a loss per share of 29 cents. But signs of a move closer to positive earnings could be received well by the market.

Founder

Then there’s the business with co-founder Mike Lynch, who’s fighting civil proceedings brought against him by Hewlett-Packard over the 2011 sale of Autonomy.

The board has denied any link between the company and the case, saying: “Neither Darktrace nor any of its acting executives was a party to the civil proceedings. Neither Darktrace nor its acting executives are the target of any investigation“.

I see no reason to think there’s any connection, and Dr Lynch has stood down from his role at Darktrace. But uncertainty of this kind really does affect investors. The sooner we see it resolved, the better.

Shorting

Back in January, Darktrace shareholders were rocked by a report that hedge fund ShawdowFall had taken a big short position on the stock.

According to The Telegraph at the time, ShadowFall said: “We believe that the quality of the Darktrace business is watery-thin, driven by an aggressive, promotional, sales focus, which we doubt will stand the test of time“.

As it turns out, ShadowFall did take a short position, but in October 2021 — which turned out to be well-timed. But since then, the shorting threat has disappeared. And today, I can’t find any evidence of any open short positions against Darktrace.

But investors still appear spooked by the January allegations. I think that brings us back to my first point, about needing to see a positive set of results.

But wait…

Two of these hurdles are, I think, wholly emotional. I don’t see any real threat from the Lynch case. And fears from the shorting episode can surely be put to rest by the results.

But even if the results are good, Darktrace still faces plenty of risk. The cybersecurity business is a very competitive one, and success is all down to advances in automated software technology. Who’s going to come up with the next major step? I’ve no idea.

But right now, I might risk a small amount of cash and may buy at the current Darktrace share price.

So, here are two growth stocks I’m looking to buy before the market recovers.

XPeng

Xpeng (NYSE:XPEV), also known as Xiaopeng Motors, is a Chinese electric vehicle (EV) manufacturer headquartered in Guangzhou.

Over the past two months, XPeng’s share price has lagged its peers, but there are some positive signs coming from the Chinese firm.

Amid Covid-19 lockdowns, the stock was pushed down by sluggish delivery growth over the first few months of the year.

However, more recent data is positive. In June, it recorded 15,295 Smart EV deliveries, marking a 133% increase year-on-year. The firm delivered 34,422 EVs in total in the second quarter, topping the list of emerging auto brands in China for the fourth consecutive quarter.

Despite this, XPeng’s valuation is actually less than that of its peers NIO and Li Auto. And it trades with a price-to-sales ratio of 5.8, which is comparable with the two other firms.

In terms of average sales price, NIO is the highest of these three companies and XPeng is the lowest. I think this could aid it as China’s economy flounders. In some cases, its offering is by far the cheapest.

As an international investor, there a several perceived risks with Chinese companies. For one, I just don’t know how bad this financial crisis is going to be over there. Secondly, there are geopolitical concerns, although I don’t see China waging war on Taiwan in the immediate future.

For me, XPeng is a buy right now as concerns over Chinese economic growth peak.

Darktrace

Investors have been talking about Darktrace (LSE:DARK) a lot, but largely for the wrong reasons. The cyber-defence firm tanked in June after one of its executives was named in a legal row concerning Autonomy’s 2011 sale to Hewlett Packard. 

The company clearly has huge potential, but valuing it has proven tricky. The share price has jumped up and down considerably since its IPO.

Darktrace is on an impressive growth curve. On Tuesday, it upped its guidance and said it expected revenue of at least $417m, reflecting year-on-year growth of approximately 48%. As a point of reference, total revenue in the year to June 2018 was $79.4m.

More than 500 net new customers were added during the year. The group’s customer base now extends to 7,400, representing a year-on-year rise of around 32%.

Given the geopolitical environment, it’s no surprise that Darktrace is attracting customers. And I see this as a theme that will pick up further in the years to come.

Some analysts are concerned about increasing competition in the space and it’s true that growth is certainly not guaranteed in this industry.

At 374p, Darktrace is a buy for m portfolio. It’s down 48% year-on-year, but I think there are considerable growth opportunities here.