The Darktrace (LSE:DARK) share price has been performing well in recent months. In fact, over the past three months the share price has doubled in value. But having seen the value slashed as it went to IPO earlier this year, there are a few reasons why I’m still sceptical about the value.
Playing in the big leagues
The main reason why I’m not convinced about the Darktrace share price is due to the outlook being priced in. Darktrace are a US/UK cyber security firm. The company was only launched back in 2013, but has quickly gained traction due to the rise in cybersecurity and the need for protection.
The company does specialise in particular areas to help firms, with in-house built AI algorithms helping to understand what normal activity is. From there, it can detect what unusual activity is, that could in turn compromise a business.
The rise in the Darktrace share price has put the market cap at £5bn as we currently stand. Although this is still smaller than the large players, it’s important to note who the large players are. The largest stocks in the cybersecurity space include Cisco, Dell and IBM. Therefore I struggle to see Darktrace really taking a meaningful share of this market away from the big players.
When I look at it from that angle, I think the current market cap and share price of Darktrace have built in an expectation of taking a decent market share. I think the market may have got ahead of itself in the expectations for the future.
No attractive risk/reward on the Darktrace share price
Added to the above is the current financial position of Darktrace. The company has been loss making for several years. The latest results are due out next week, but expectations are for another loss to be shown for the full-year ending in June.
I get that tech companies such as Darktrace have a characteristic of being loss-making in early years until enough traction has been reached. Yet when looking to invest my money into a company, I think I can find better places right now.
For example, why not invest in one of the larger players in the market, that are already profitable and offer lower risk? If the Darktrace share price was lower then maybe the risk/reward would stack up more. But given the recent rally, I don’t think the company looks undervalued.
I could be wrong and Darktrace could be bought out by a larger company at a higher price, giving shareholders an attractive payday. Yet for the moment I’ll be staying away.