The Darktrace (LSE:DARK) share price erupted by over 16% this morning after management released its latest half-year report. What was in it that has investors so excited? And is it too late for me to snatch up some shares? Let’s explore.
The rising Darktrace share price
As a reminder, Darktrace is a cybersecurity technology business. The firm provides an AI-driven platform that leverages machine learning to automatically adapt whenever encountering a new threat.
That certainly sounds like a promising platform. And it’s easy to see why investors are getting excited about Darktrace’s share price potential, especially looking at the latest results. The group has expanded its customer base to 6,531. That’s a 40% jump compared to a year ago, demonstrating a rise in popularity as a cybersecurity solution. And with the vast majority buying two or more products from Darktrace’s tool box, revenue has surged by 52%, reaching $192.6m (£143.9m).
Seeing such vast top-line growth is undoubtedly impressive. However, for technology companies this is somewhat expected. What I find more encouraging is that the company actually moved out of the red and into the black. Net income came in at $5.9m (£4.4m) achieving what most young technology businesses struggle with – finding a path to profitability.
With that in mind, I’m not surprised to see the Darktrace share price surge on this report.
Taking a step back
As encouraging as these figures might be, there remains a long road ahead. The emergence of profitability is a solid signal of progress, in my opinion. But the group still remains dependent on external financing. And it will likely stay that way until cash flows can expand further. That obviously adds an elevated level of risk, especially now that macroeconomic factors are reducing general capital liquidity.
What I’m also keeping an eye on are those customer numbers. While they’re heading in the right direction, some ex-clients have described the technology as “snake oil”. If that assessment is accurate, many of its new clients could be heading for the exit. Churn rates have fallen from 8% to 6.4% over the last 12 months, but I think it’s still too soon to draw any meaningful conclusions.
Having said that, my biggest concern actually lies with the valuation. The AI cybersecurity market is estimated to reach $46.3bn by 2027. By comparison, in 2020, the market size stood around $10.5bn. Needless to say, that’s a lot of growth potential for this business.
However, with a market capitalisation of £3.2bn, it seems investors are valuing the firm based on future expectations rather than existing fundamentals. In my experience, that’s a recipe for enormous share price volatility – something Darktrace is no stranger to.
The bottom line
These latest results are an encouraging step in the right direction. But, personally, the valuation remains too rich for my tastes. And with other unknown factors surrounding this young business, I think Darktrace and its share price still have plenty to prove. Therefore, I’m keeping the stock on my watchlist for now.
Zaven Boyrazian 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.
