Last year, I was a vocal critic of Darktrace (LSE:DARK) shares, even as the price rose higher. The share price doubled in three months, but I had concerns about the high valuation and lack of strong financials. Since Q4 last year, Darktrace shares have crashed. Although the share price is still up 51% from the IPO level last April, the stock is down just over 50% since the start of October. So, at what point should I be a buyer?
Why Darktrace shares have been falling
Before I can think about the levels at which I’d consider buying, I first need to understand why there has been a reversal in the share price. November was a particularly bad month, with a 40% drop seen. One of the reasons for this was the end of the lock-in period for early-stage investors. There are usually measures in place to prevent large share sales in the first six months following an IPO. Yet when this period ends, large funds or others that were involved early on are free to do as they wish.
The six-month grace period ended in November, and unfortunately there were some chunky share sales. This also has a compounding effect on smaller investors. If some early investors are selling out, why should I continue to hold on? Do they know something I don’t?
Another reason for Darktrace shares moving lower has been negative research reports from brokers. Two notable ones that come to mind are Peel Hunt from October and Shadowfall just a few weeks ago. The criticisms raised in these reports centered around the company being overvalued and having style over substance.
Given the weight that these reports carry with them, it’s easy to see why some investors decided to pull the plug and sell the stock.
Thinking about buying
From my point of view, the current share price of 377p is too expensive. The IPO price was set at 250p last April. I’d need to see it closer to this level before I’d consider buying. The main reason for this is that I think it’s a risky stock to get involved with.
Apart from the reasons mentioned above, news in the past couple of days has broken that Mike Lynch has stepped down as an adviser to the company as he faces extradition to the US on criminal charges. He was one of the very early investors in the business from 2013. This could cause reputational damage to the company.
However, I do feel that the company has fundamental value. The behavioural cyber defence software that the business has is incredibly smart and sophisticated. I also believe that cyber security is going to be a growing area in years to come as we continue to become more digitally savvy and spend more time online.
On that basis, I’m keen to invest in Darktrace shares, but not yet. I think the share price can move lower in the near term, so will be eyeing up 250p to get involved.
Jon Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
