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It’s been an amazing week. Darkness (Lessie: Dark) shares fell by a quarter this week and now trade 48% below their year-ago levels.
Does that make them an attractive value proposition for my portfolio?
There is no compromise.
In fact, even though Darktrace shares fell this week, they’re basically back where they were last month. It was before the firm announced that it could bid on several unsolicited, preliminary and conditional proposals. It was reported this week that the suitor was no longer interested in pursuing the deal, causing the stock to plummet.
Positive business trends
But if a bidder decides not to purchase Darktrace, should I?
I think the company’s investment case is strengthened by the strong full-year results it published this week. Revenue has grown by 46 percent compared to last year. Net profit was $1.5 million. That may sound small, but it was a welcome change from the firm’s 145.8m net loss last year.
Free cash flow also jumped. It came in at $99.5m for the 12 months, almost quadrupling. I think it shows some of the long term cash generation potential of the company.
These positive trends in Darktrace’s business performance suggest that there is wind in the sails. I expect further strong growth in the coming years.
Are Darktrace shares worth the money?
Still, is the current valuation associated with Darktrace shares worth it?
After all, even after Darktrace’s shares are down, the company still commands a market capitalization of £2.7bn. For a company that made a net profit of around £1.3m in its last full year, this represents a price-to-earnings ratio of several thousands! That’s incredibly high. In fact, the ratio could drop to more attractive levels as the company continues to grow earnings significantly in the coming years. But for now, it seems expensive to me.
Although the business is doing well, I think the shares look expensive. They seem to value perfection, but in reality growing companies in new industries can often run into unexpected challenges.
I also have no reasonable doubts about the sustainability of Darktrace’s competitive advantage. A loaded customer base should be of some help as the company looks to build on its success so far. But I see the barriers to entry in the rapidly growing cybersecurity space as very low. I don’t know if Darktrace can sustain its impressive growth rate in the long run.
My step
Based on that, I certainly don’t see Darktrace shares as a steal for my portfolio at their current prices. In fact, I think the company may struggle to even maintain its current valuation, especially if customer growth or profits fall short of expectations. For now, I’m going to walk away from the prospect of putting my money into Darktrace, even if it’s just as small as the finder.