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Darktrace (LSE: DARK) shares have experienced weakness recently. Less than six months ago, they were trading above 500p. Today however, they can be snapped up for around 260p.
Is now a good time to buy the cybersecurity stock for my portfolio? Let’s take a look.
$2trn market opportunity
One thing I like about Darktrace from an investment perspective is that it operates in a high-growth industry. According to McKinsey, damage from cyberattacks will amount to around $10.5trn annually by 2025 – a 300% increase from 2015 levels.
McKinsey’s analysts believe that the total addressable market for cybersecurity companies could be worth up to $2trn. So companies in this space are likely to have some huge tailwinds in the years ahead.
Cyberattacks are proliferating, causing trillions of dollars of damage every year. The cybersecurity industry has a chance to step up and seize the opportunity.
McKinsey
Another thing I like about the company is that it is now profitable. For the year ending 30 June, analysts expect the group to generate a net profit of $29.3m. For the following year, they expect a net profit of $45.7m.
Consistent profitability will enable investors like myself to value the company more accurately. It should also reduce share price volatility (the stock has been extremely volatile since it came to the market in 2021).
Sky-high valuation
On the downside however, Darktrace shares are still very expensive. Earnings per share (EPS) are forecast to come in at $3.88 this financial year. That puts the stock on a forward-looking price-to-earnings (P/E) ratio of around 83 right now.
The problem with a valuation this high is that it doesn’t leave any room for error. This was demonstrated earlier this month.
On 11 January, Darktrace reduced its revenue growth guidance for this financial year to between 29% and 31.5%, down from its previous growth forecast of 31-34%. This development – which the company blamed on macroeconomic forces – sent the stock down nearly 20% to a record low.
The current macroeconomic environment is creating challenges to winning new customers, with prospects more reluctant to run product trials.
Darktrace CFO Cathy Graham
Another issue to be aware of here is that brokers have been cutting their price targets for the stock (significantly). For example, on 12 January, analysts at Needham cut their target price to 330p from 622p. This kind of negative broker activity could limit share price upside in the near term.
Finally, it’s worth pointing out that Darktrace operates in a very competitive industry. Rivals include Palo Alto Networks, CrowdStrike, and Fortinet. It’s going to have its work cut out to compete against these kinds of players.
My move now
Weighing everything up, I’m happy to leave Darktrace shares on my watchlist for now. The company does appear to have potential. However right now, the shares look a bit too risky for me.
