The last time I looked at the pros and cons of adding Darktrace (LSE: DARK) to my portfolio, I decided against it. I felt that it was unclear whether the business had a strong, sustainable competitive advantage. Added to that, Darktrace shares looked expensively valued to me.
Has anything changed?
The company updated the market today (11 January) on trading in the first half of its financial year and broadly speaking the tone was very upbeat.
Given that I take a long-term approach to investing, could Darktrace merit a place in my portfolio to be held for years to come?
Lingering doubts
In short, no. For now at least, I have no plans to add the shares to my portfolio.
The company uses a variety of metrics such as “annualised recurring revenue” that I feel do not help me as an investor understand what is happening on a statutory reporting basis. It did say that it expects year-on-year revenue growth for its first half of at least 27%, which is very strong. Its customer base was 13% larger than a year before. Clearly, Darktrace is in growth mode.
Valuation concerns
However the valuation still looks very pricey to me.
Using the most recent full-year figures, the price-to-earnings ratio is nearly 50 while the price-to-sales ratio is over five. Even if I think a company has strong growth prospects to grow into, I try to avoid a valuation I think is excessive.
Compared to the current business performance, I think Darktrace shares look overvalued.
But I am concerned that they are overvalued even when allowing for the prospects of future growth. After all, such growth is never guaranteed and there are risks along the way.
Demonstrated risks
Take the company’s difficulties adjusting its sales approach this year.
It said that in regard to its current financial year, “initiatives undertaken to ready its Go-to-Market strategy and teams for the next phase of its evolution had a larger impact on sales activity in the first quarter than expected”. In other words, the firm misjudged the commercial impact of some of its sales activities.
That is not necessarily bad. It said in today’s statement that the impact of those changes helped it achieve a strong second quarter. But it raises questions about whether management has all the commercial acumen it needs.
Disruptive strategy
I also feel that, if changing a sales strategy is highly disruptive, it can suggest customers see a product as dispensable. That again makes me concerned as to how strong a competitive advantage Darktrace has versus its many rivals.
As a long-term investor, I like the growth story in the cybersecurity space. Darktrace has demonstrated clearly that it is able to benefit from that.
But the shares continue to look expensive to me, so for now I remain on the sidelines.
The post Are Darktrace shares a bargain for the long-term investor? appeared first on The Motley Fool UK.
Like buying £1 for 51p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
With Shell’s share price down 12%, is now the time for me to buy more?
Here’s how I’d turn £200 a month into a second income for retirement
Is the Barratt dividend headed in the wrong direction?
What’s the intrinsic value of Rolls-Royce shares?
3 steps to recurrent income of £1,000 by investing £11,230
C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
