The idea of a company that could double its revenue in the next few years is an attractive one. And I’d say we’re more likely to find one in the FTSE 250.
I’d expect it to be a high-tech growth stock. And we find more of those in the mid-cap index.
As an aside, there’s a long-held risk from investing in these smaller stocks, from their focus more on the UK. It makes the index more exposed to the UK economy, without so much global spread to help offset it.
But I just read a fun fact. It seems that 57% of FTSE 250 revenue these days comes from outside the UK. So maybe that risk isn’t so great now.
Cybersecurity
The stock I’m picking today, Darktrace (LSE: DARK), is very much international in its outlook.
The firm, which describes itself as “a global leader in cyber security AI”, put in a cracking first half for the current year. The share price responded well, but it’s still way down from its all-time high.
On those interim results, CEO Poppy Gustafsson said: “At the start of this financial year, we characterised our FY 2024 expectations as first half stabilisation and second half re-acceleration.“
Revenue growth
First-half revenue for Darktrace grew by 27.4%. And, in what might be the biggest rise in precentage terms I’ve ever seen posted, net profit soared 8,939.2%. Now, that’s only because the previous year’s profit was tiny, but I include it as a bit of trivia.
More importantly, the board expects revenue for the full year to grow between 23.5% and 25%, with an adjusted EBITDA margin of at least 21%.
That’s a growth stock, if ever I saw one.
Forecasts
What’s more, forecasts show more of the same. From the $545m posted for the 2023 full year, brokers expect revenue to climb to around $970m by 2026.
That’s a 78% gain in just three years. And that $545m in 2023 was 94% higher than 2021’s $281m. So revenue almost doubled already in the past two years. Can it double by 2027? I’d almost put money on it.
Does this make it a good stock to think about buying now? That’s a harder question. Many growth stock investors can only dream of growth like this in such a short time. But it has to be seen against one key thing, namely valuation.
Stock valuation
Darktrace is on a high price-to-earnings (P/E) ratio. In fact, the trailing figure for 2023 is up at 55.
For it to drop to the long-term FTSE 250 average P/E of about 18, we’d need earnings per share (EPS) to treble.
I think that’s plausible. But I don’t see a lot of safety margin in today’s valuation. And that’s even now the share price has lost more than 60% since 2021’s peak.
I also wonder if hopes might be bumped a bit too high by the Artificial Intelligence (AI) angle. It could give cybersecurity a big boost. But anything AI these days does seem to have a bandwagon factor.
So buy or not? The jury’s still out here.
This post was originally published on Motley Fool
