The share price of the UK-listed cybersecurity group Darktrace (LSE:DARK) has had quite a volatile run since its IPO in April last year. A lot of initial investor excitement about the business pushed the stock to as high as 1,003p, only to collapse again shortly after.
Today, the Darktrace share price jumped by nearly 10%, pushing it back above 400p. But why did it crash in the first place? And should I be considering this business for my portfolio? Let’s explore.
The volatile Darktrace share price
Let’s start with a bit of background. Darktrace provides a cyber-security solution driven by artificial intelligence. Using machine learning, the technology can “study” how a piece of malware works to eliminate it and remember the solution for the next time it encounters something similar. It’s basically a self-leaning immune system for computer systems.
That certainly sounds like an exciting piece of technology. And given the incredible run the tech stock had last year, rising from 330p to over 1,000p within a few months, I think investors were pretty sold on the growth potential of this business.
But an analyst at the investment bank Peel Hunt wasn’t convinced. And released a critical report against the firm with a target price of 473p. This was after the discovery of some ex-customers who described the technology as “snake oil”.
With such a low price point, combined with uncertainty surrounding the technology, the Darktrace share price plummeted. And the fact that insiders began selling off shares later in the year didn’t exactly help calm investors’ nerves.
Did investors overreact?
Seeing rapid declines in high-growth technology stocks isn’t exactly an uncommon sight. After all, the market capitalisation did reach around £7bn despite the company only generating about £206m in revenue. However, it’s possible that the sell-off was a bit pre-mature when looking at the latest trading update.
A primary concern in the Peel Hunt report was the underwhelming technology. Yet it seems the company has had no trouble attracting new clients to its roster as total customers by the end of December 2021 reached 6,531 – a 39.6% increase versus the previous year.
As such, revenue for the six month period is expected to grow by an impressive 50% rate. And consequently, management has increased its full-year revenue growth guidance from 35%-37% to 45%.
Needless to say, this is quite impressive, especially for a company that was supposedly struggling to retain customers. So, I’m not surprised to see the Darktrace share price start climbing again.
Time to buy?
As the world becomes more dependent on technology, the demand for cybersecurity solutions continues to rise. Darktrace certainly sounds like a promising company. However, it’s still relatively young, with a vast amount of competition that has significantly more resources than it to contend with.
Personally, I think it’s too early for me to invest in this business. But I’ll be keeping a close eye on how it performs over the coming months.
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Zaven Boyrazian does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned at the time of writing. Views expressed on the companies, assets, and strategies mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.
