Is the Darktrace share price good value?

Growth in cybersecurity stocks looks like one of the better plays in the technology sector right now. Not only have tech stocks taken a beating, meaning there could be some bargains out there, but the need for online security is greater than ever.

Take the Darktrace [DARK.L] share price. On 3 March, Darktrace’s stock hit an intraday high of 557.661p, yet since then the share price has declined sharply to close Friday 24 June at 335.3p. Year-to-date, the stock is down 14.33%.

Some of Darktrace’s share price turmoil can be put down to the continued legal woes of former company advisor and Autonomy co-founder Mike Lynch. Other factors include investors ditching growth stocks and the general pessimism in equity markets.

Yet, Darktrace’s fundamentals suggest a long-term investment case that makes the current share price an attractive entry point.

Why should investors care about Darktrace’s share price?

In the long term, the Darktrace share price could benefit from the rapidly expanding cybersecurity market. Trends that have powered demand include hybrid working, cyberwarfare and the continued growth of online platforms.

According to Fortune Business Insights, the global cybersecurity market is forecast to expand at a CAGR of 13.4%, to be worth $376.32bn by 2029. In the UK, an IPSOS report published last year on the country’s cybersecurity sector said that firms in the space raised over £821m in 2020, more than double the amount raised in 2019. The report went on to say that in 2021 the UK cybersecurity sector was worth £8.9bn, up 7% year-over-year.

What do the fundamentals look like?

Some of this optimism comes down to Darktrace’s continued revenue growth. In first three months of 2022, Darktrace said it had 359 new net customers, up 37.3% year-over-year and bringing the total number of clients to 6,890.

Revenue for the quarter was $109.8m, with revenue for the nine months ending 31 March at $302.4m. This reflected year-over-year growth of 50.1% and 51.5% over the same quarter and nine-months of full year 2021, respectively.

Annualised recurring revenue (ARR) was $35.4m for the third quarter and $105.3m for the nine months ending 31 March — up 56.8% and 51.3%, respectively.

Given the positive momentum and growth in its customer base, Darktrace upped its guidance for full-year 2022 constant currency ARR. It now expects year-over-year ARR growth of 40–41.5% (previously 38.5–40%), which implies year-over-year growth in net ARR of 29– 34% (previously 24–29%).

However, the company said that its cost structure will increase due to the return of travel and entertainment costs, moving into a larger premises and the €47.5m purchase of Cybersprint in a cash and equity deal.

Is Darktrace good value?

Darktrace’s share price is undervalued, according to senior investment analyst Ben Alaimo. Writing for Seeking Alpha, Alaimo forecasts 40% revenue growth this year, followed by 30% growth for the next two to three years. Using a valuation model that takes discounted cash flow, Alaimo suggests that the fair price for Darktrace’s stock is £5.49 per share.

Investors Chronicle’s Robin Hardy takes a similar position, saying that Darktrace’s share price “should probably be in the 500–600p range”.

Previously, Hardy had been concerned about the stock’s valuation, noting that growth in the business was slowing at its slowest rate in five years, though the stock was trading at its highest EV/Sales ratio. Yet, predictions of a £20–25m pre-tax loss by 2024 have now swung to an expected £20–25m profit by that point.

Analysts also seem optimistic on Darktrace’s stock. Of the six polled by Refinitv, the 12-month median price target is 815.39p, suggesting a 143.2% upside on Friday’s close. Even the most bearish price target of 503.91p would see a 50.3% return.

As ever, trying to put a valuation on a company that hasn’t turned a full-year profit is difficult. Yet, Darktrace is clearly operating in a growing market and could be a good option for investors sifting through 2022’s battered tech stocks.