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of Darkness (LSE: DARK) The cyber security company’s shares fell 30 per cent on Thursday morning after it confirmed US private equity buyer Thomas Bravo had pulled out of talks.
Alongside this exciting news, Darktrace reported its first annual profit and confirmed previous growth forecasts for the 2022/23 financial year.
Thursday’s decline was a painful blow for buyers who held the shares over the past 12 months. But with the company now turning profitable, I’m wondering if Darktrace shares might warrant a buy at current levels.
Painful Loss: What’s Next?
Let’s get the bad news out of the way first. A year ago Darktrace shares were trading at around 725p. As I write, it is hovering around the 335p level – a 54 per cent drop.
This fall means that a £1,000 investment in Darktrace shares a year ago would be worth just £460 today.
Most long-term investors have been in this position to some degree. Of course I have. Investments are not working out as I thought and I have to make a decision. Should I continue to hold or should I sell to protect myself from further losses?
The approach I usually take is to take a fresh look at the business. Does investment history still make sense to me? And is the stock price reasonable or does it seem too expensive?
Making progress
As a potential investor, I would buy Darktrace shares now only if the company’s performance and valuation both justify a breakout view.
Today’s results cover the year to June 30 and appear to show some improvement. Darktrace’s revenue rose 45.7% to $415m last year on a pre-tax profit of £5.3m.
The company said it had seen good sales growth last year. The number of clients increased by 1,808 to 7,437.The maximum value of live contracts increased from $763 million to $1,004 million.
This increase was achieved through a 7.9% increase in average annual recurring revenue (ARR) per customer. New contract ARR grew by 13%.
These numbers tell me that Darktrace is signing up more customers than ever before. The company may be selling more services to its customers than in previous years. Good news.
Darktrace Shares: My View
Unfortunately, it’s not all good news. Darktrace continues to experience reputation issues. The company’s founder, billionaire Mike Lynch, is fighting extradition to the US on fraud charges at his former business.
Short sellers targeting Darktrace have questioned whether the company has a strong sales culture and why Darktrace spends less on research and development than some rivals.
Despite these concerns, I think Darktrace has some attractions as a potential technology investment. However, I don’t believe the shares are a good value at current levels.
My sums suggest that even after Thursday’s decline, Darktrace shares are still projecting at 90 times forecast earnings in 2023.
Given the question marks surrounding this business, that’s too much for me. I’ll continue to watch Darktrace from the sidelines, but I won’t buy shares at current levels.