Darktrace (LSE: DARK) shares have attracted plenty of negative attention since the company came to the market earlier this year. The corporation has been criticised for its opaque business practices and high valuation. While these criticisms do have some weight, they do not discourage me from buying the stock.
Company potential
Some investors might be worried about Darktrace’s business model, but I think the company’s results speak for themselves. The firm uses AI-based models to help identify and stop cyberattacks before they can cause too much damage.
Of course, the business does not go into too much detail about these processes. It cannot really. Doing so would give away secrets to its competitors… and hackers.
However, we only need to take a look at the firm’s customer list to see that it is clearly offering something that works.
It counts governments and multinationals as clients and had 5,600 customers, up 42% year-on-year, at the end of its last fiscal year. If the product did not work, I do not think these customers would be willing to hang around.
And with the number of customers using its products expanding rapidly, I am not too worried about the firm’s valuation. At the time of writing, Darktrace shares are selling at a price-to-sales (P/S) multiple of 13. Some of its American peers command a valuation nearly double this level. As such, when compared to its international peer group, Darktrace appears cheap.
So, in my view, Darktrace looks cheap, has a highly sought-after product, and is growing at a high double-digit rate. These are the main reasons why I am backing the stock in 2022. The firm is still a relatively young public business, and it needs to build the market’s trust.
Over the next 12 months, investors will be able to build a better understanding of the business and its prospects. I think this could translate into a higher valuation and, as a result, a higher share price.
Risks of owning Darktrace shares
There are some risks the company will have to navigate if its growth is going to continue. These include fighting off competition from larger peers with deeper pockets and keeping ahead of the hackers.
Darktrace needs to keep investing for growth to stay ahead. If it starts struggling and hackers begin to break through its defences, the firm’s reputation could take a severe hit. I would argue that this is the most considerable risk the company faces today.
Despite the above risks, I would be happy to buy Darktrace shares for my portfolio in 2022. The company’s growth potential and unique business model are desirable qualities. Only a handful of other businesses have the same potential for the year ahead. Especially as the economic environment remains highly uncertain.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has 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.
