Earlier today, I looked at three companies from the FTSE 100 that are involved in the flood of results expected in March. I’m now turning my attention to three growth stocks from the FTSE 250.

Darktrace

Recently demoted from the FTSE 100, cybersecurity specialist Darktrace (LSE: DARK) is first on my list of second-tier stocks to watch next month. It releases interim numbers on 3 March. 

The former market darling has now given up most of the gains it made since becoming a listed company. That’s a quite shocking reversal considering just how important cybersecurity already is and the potential growth that lies ahead. Darktrace’s undoubtedly impressive self-learning AI can be applied to multiple industries too.

Then again, I do understand why sentiment has changed. As good as Darktrace’s tech appears to be, there can be no doubt that it’s operating in a highly competitive space. Brokers also remain concerned by the company’s low level of R&D spending.

Unfortunately, the valuation of almost 11 times sales still looks rich to me as well. In fact, I wonder if the stock will fall further in March if traders continue to shun unprofitable growth stocks in favour of more traditional value plays. 

I still can’t bring myself to get involved just yet.

Greggs

The advent of higher prices at food-on-the-go retailer Greggs (LSE: GRG) makes its next update an essential read in my opinion. The sausage roll seller reports final results on 8 March.

Shares in Greggs have tumbled almost 25% in 2022 so far. Is the actual business 25% less valuable though? As a holder, I won’t be surprising anyone when I say that I don’t think it is. Yes, the departure of long-standing CEO Roger Whiteside isn’t ideal. And, no, the spread of the Omicron variant late last year can’t have helped trading.

But these are temporary setbacks. Helped by its strong brand and marketing savvy, I have no doubt Greggs can deal with pretty much anything that comes its way. I also doubt its loyal fanbase will resent a 5p price hike for long.

At less than 21 times forecast earnings, Greggs still isn’t cheap as chips to acquire. However, the price is far more palatable than it once was. Since I plan to keep the stock in my portfolio for years rather than weeks, I’d have no issue increasing my holding next month.

Computacenter

A final FTSE 250 member I’ll be watching is IT solutions provider Computacenter (LSE: CCC). While a 7% drop in the share price year-to-date is unfortunate, investors here have fared a lot better than other UK growth shares.

I can’t see full-year results on 16 March being anything less than solid. Back in January, Computacenter reported that recent trading had been ahead of expectations despite supply chain headwinds.

The question I’m asking now, however, is how much of this is already factored into the valuation. The fact that Computacenter’s share price didn’t move higher after its last update suggests quite a bit. Perhaps investors are getting concerned about just how thin margins are at the Hatfield-based business?

On the flip side, its shares currently change hands for 17 times earnings. That’s cheap compared to peers in the industry. There’s also a 2.2% dividend yield, easily covered by forecast profits.

For now, the company stays on my watchlist.

The post 3 FTSE 250 growth stocks I’ll be watching in March appeared first on The Twelfth Magpie.

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Paul Summers owns shares in Greggs. 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.

Key points

• Darktrace isn’t currently profitable.
• Wise is moving in the right direction.
• Idox Group could have some serious growth potential.

The Darktrace (LSE: DARK) share price has fallen 55% from its peak of 985p in September 2021. Investors clearly grew overexcited after its blockbuster IPO in April. While the company’s revenue and earnings outlook are improving, I think they still don’t yet justify the share price. I like to invest in tech stocks because of their scalability and critical role in the modern economy. But I think there are a couple of other options that would be better for my portfolio.

Cybersecurity

I still think that Darktrace has the chance to do well in the future. The company is in excellent financial health, has no debt and all its assets easily cover its few liabilities. Its AI driven, machine learning approach to cybersecurity could be nothing short of revolutionary, and its subscription business model could lead to a massive user base over the coming years. The problem simply is that Darktrace isn’t profitable yet and hasn’t been for some time. Revenues have increased by $80m in 2021, but earnings fell to -$149m.

Online payments

Wise (LSE: WISE) is an online payment and cash transfer company based in the UK. It too went public in early 2021 and it too saw its share price soar to 1,140p before slowly crashing back down to 649p at time of writing. A big difference between Wise and Darktrace however, is that Wise is profitable. Its margins are small, but 2021 has been a period of incredible growth for the company. Customers increased by more than 50% from 6m to 10m. Revenue jumped too from £302m to £421m. Again, only £39m of that was profit, but Wise has also been expanding into new territories and developing new products that could pay serious dividends in the future. These small profit margins could cause problems if the company runs into some unexpected issues, but for now all of the numbers are moving in the right direction. I’d be excited to add it to my portfolio.

Public sector software

Idox group (LSE: IDOX) is a software development company I’ve talked about a few times now. Currently trading for a mere 67.75p, it suffers even more acutely than Wise from small profit margins. It is profitable, but had a spotty couple of years in 2018 and 2019.

Earnings reports for the whole of 2021 have not been published yet, but for the financial year ending 31 October 2021, Idox reported revenue increased by 8% to £62.0m, and recurring revenue grew a further 2%.

If it can continue this growth over the coming years, I think we could see the share price rise significantly. It’s a bit of a gamble, but I’d happily add it to my portfolio.

What I’ve taken away from this research is that just because something is in the headlines doesn’t mean it’s a good investment. In fact, it could even mean the opposite. I’ll definitely keep my eye on Darktrace over the coming years, but for now there just seem to be other, better options for my portfolio.

The post The Darktrace share price is still overvalued. Here are 2 UK tech stocks I’d buy instead appeared first on The Twelfth Magpie.

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• 2 excellent growth ideas for a Stocks and Shares ISA in June 2026
• Below £8, this high-growth UK fintech stock looks like a bargain to me
• After crashing 13.7% today, is Wise now a stock market bargain at 805p?

James Reynolds 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.

Back in August, I questioned whether the Darktrace (LSE: DARK) share price was a ticking time bomb. Despite concluding that it probably wasn’t, I did suggest that it might let off some steam at some point. 

In retrospect, it turns out that the former may have actually have been appropriate. The cybersecurity firm’s value has tumbled 30% in the last month alone.

Is it time for me to scratch that contrarian itch (as others seem to be doing today) or could there be more bad news to come? Let’s begin with a quick recap.

The Darktrace share price: what gives?

It was all going so well. Priced 250p a pop at its IPO, Darktrace stock went as high as 1,003p per share earlier this year. Towards the end of October, however, it all began to unravel.

The first capitulation occurred when analysts at Peel Hunt questioned whether the company was really worth its multi-billion pound valuation. Citing growing competition and Darktrace’s low R&D spend, their target price was just 473p. 

The downward pressure then continued as the post-IPO lock-up period came to an end and original investors jettisoned their holdings. Board members were also active sellers. Records show non-executive director Vanessa Colomar pocketed over £8m in November. That’s hardly encouraging.

From hitting that 52-week high, the Darktrace share price has now fallen 60%. So, where does it go from here?

Where next?

As always, no one knows for sure. So, let’s focus on a few positives first.

There’s little point arguing against the idea that cybersecurity will remain a major investment theme going forward. Assuming nothing truly awful happens, it seems likely that Darktrace’s self-learning AI will likely mop up a decent proportion of this business from multiple industries looking to protect themselves from bad actors operating online.

Regardless of share price antics, it’s also clear the firm is growing well. October’s Q1 trading update revealed a 50.8% increase in revenue (to $93.1m) compared to the previous year. FY22 growth of between 37% and 39% is now expected. Broker Berenberg remains a fan too, recently stating that “any share price capitulation is a result of fear not fact“.

On the flip side, one can argue that the valuation is still too high at a price-to-sales ratio of 13. While seemingly unrelated, the rise of Omicron could also push investors to sell what they can and batten down the hatches. Even if the general market sell-off doesn’t continue, Darktrace should be demoted from the FTSE 100 on December 20. 

The situation isn’t helped by the Cambridge-based business having a very small free float (the number of shares available to buy and sell on the market). This could make any falls all the more dramatic because it takes less to budge the needle. Of course, big moves in the opposite direction can also occur, as evidenced by today’s 6% rise.

Better opportunities

Darktrace is in something of a dark place right now. While more positive on this company compared to fellow 2021 IPO stock Deliveroo, I can’t help but think that its similarly unprofitable status could haunt it going into 2022, especially in a market where traders are already nervous about the pandemic and the threat of rising interest rates. 

In looking for compelling growth plays, the £2.6bn cap doesn’t make my shortlist just yet. 

The post The Darktrace share price is down 30% in one month! Where’s it going in 2022? appeared first on The Twelfth Magpie.

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• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Deliveroo Holdings Plc. 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.

I didn’t start investing until my late 20s. What followed was a steep learning curve, albeit helped by following the thoughts and dealings of some of the best money managers in the business. One in particular — Fundsmith Equity‘s Terry Smith — has probably served a bigger role in my education than any other.

Terry Smith on quality

Terry Smith looks for winners. In practice, this means surveying the market for companies that already possess a strong/leading share of their market and can be depended on to protect it. This is why many of the stocks that make up the Fundsmith Equity portfolio have been around for many decades. Past performance might not be a guide to future returns but it can help when looking for resilient businesses that have consistently managed to grow revenue and profit.

These days, I’ve a penchant for smaller companies flying under the radar. That said, I’m still applying a quality criterion like Terry Smith. Aside from the characteristics already mentioned, I’m on the hunt for businesses generating high returns on capital and big margins. This means I now steer clear of capital-intensive businesses like airlines (which Smith labels “machines for losing money“). 

Like Smith, it also means I’m very selective about what makes it into my ISA portfolio these days. Only 29 holdings make up Fundsmith Equity right now. So long as I’ve picked well, operating a concentrated portfolio can turbocharge my returns. Of course, the opposite is also possible! 

Price matters…to a point

‘Buy low, sell high’: that’s the rule that every investor tacitly learns on entering the market.

Terry Smith doesn’t go against the grain here. However, the UK fund manager has frequently pointed out that focusing too much on valuation can prove detrimental to returns. For Smith, a stock’s price is of secondary importance to how good a company is (see above). A cheap stock can always stay cheap while a more expensive stock can go on increasing in value. In other words, contrarians/value hunters don’t always prosper. This is why Smith picked up stocks like Nike and Starbucks in the 2020 market crash rather than buying ‘bargain’ travel stocks. 

As an investor, I’ve come around to the idea that simply trying not to overpay is preferable to buying what’s cheap. This is also why I’m wary of unprofitable, flavour-of-the-month companies such as cybersecurity firm Darktrace even when its prospects look undoubtedly solid. So long as I’m paying a not unreasonable price, I know the risk/reward should theoretically be (more) in my favour.

No gimmicks

A final thing I like about Smith is his no-nonsense approach. He picks stocks that he expects to generate a better return for holders than the market. He doesn’t short (bet against) any companies. Nor does he use derivatives or get involved in any creative financial practices like some managers might.

Most importantly, Smith has taught me that investing is as much about what you don’t do as what you do. In practice, this means buying stocks with the intention of holding for years rather than attempting to ‘time the market’.

Not only is predicting the short-term movement of a share price very difficult, it only guarantees fees. As Smith frequently highlights, Fundsmith has very low turnover, meaning that investors ultimately get to keep more of the profits made.

The post No savings at 30? Here’s how I’m using Terry Smith’s strategy to build wealth appeared first on The Twelfth Magpie.

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• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
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• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers owns shares in Fundsmith Equity. 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.

Why I’m still avoiding Darktrace

I’m generally very bullish on the cybersecurity sector going forward. The sheer growth of online activity and the Internet of Things will greatly increase the pressure on businesses to protect customers and clients from any nefarious so and so. 

Seen from this perspective, it’s not hard to understand why the Darktrace share price did so well initially. Unfortunately, I think we’re now seeing the (inevitable) backlash. Broker Peel Hunt’s less-than-complimentary research note was the catalyst, suggesting that the stock was worth only 473p. That’s less than half the level the Darktrace share price hit earlier in the year. That 473p is also 20% or so lower than the price as I type.

So could Darktrace fall to that level? Perhaps, if insiders began selling their stock. Some profit-taking may be inevitable. But cashing in as soon as the lock-up period ends today would send a message that even they think Peel Hunt may be right. 

Not that I’d actually blame them. Despite the recent fall, Darktrace stock still boasted a heady valuation of 23 times sales before the market opened. That’s an awful lot of hope that remains priced in.

If I were to get exposure to this sector, I’d likely opt for a cheap exchange-traded fund such as L&G Cyber Security instead. It’s delivered a 36% return over the last 12 months. That’s a lot less than Darktrace (+81%) but one needs to consider the risk/reward trade-off. Had I picked up the latter’s stock one month ago, I’d actually be 25% underwater!

Another risky growth stock

Today’s half-year update only serves to confirm my belief that ticket app Trainline (LSE: TRN) is another growth stock I’d best avoid for now. Based on the double-digit percentage decline in its share price this morning, it seems I’m not alone.

Yes, the numbers look great initially. Net ticket sales and revenue jumped 179% to £1bn and 151% to £78m, respectively, in the six months to the end of August year-on-year.

But let’s get things in perspective. I didn’t see many people sprinting to catch a train last year. As such, the latest growth was always on the cards. Moreover, TRN still registered an operating loss of £9m, even if this was much better than the £43m loss reported this time last year.

My chief concern here is that far fewer of us are returning to the office than expected. The explosion in the property market this year would tend to back this up. That’s concerning for holders, especially as TRN already faces competition.

Making no change to previous guidance, Trainline believes it will generate full-year net ticket sales of between £2.4bn and £2.8bn. However, this is “assuming the market recovery continues“. With Covid-19 infection levels rising again, that may prove an assumption too far.

As an app, I like Trainline. As an investment, however, I struggle with it. Despite bullish talk of growth opportunities in Europe, I suspect ongoing (heavy) investment in staff and marketing will continue to impact sentiment.

As with Darktrace, I’m steering clear.

The post Darktrace falls again! It’s not the only UK growth stock I’m avoiding appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers 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.

This move came after Peel Hunt’s downgrade to ‘sell’ with a forecast price of 473p. The broker’s report suggested that the Darktrace share price was overvalued factoring in the revenue figures and low R&D budget. 

For me, historic performance is a crucial indicator of returns in the tech space. And for the past three years, Darktrace has been recording a net loss. But it should be noted that performance has been improving. The recently published half-yearly 2021 report showed an annual growth rate of 40% and 42% growth in its active customer base.

But I still think there are much better offerings in the UK market at the moment. Here are two stocks operating in exciting areas within the tech space that I think are much better growth options than Darktrace.

FTSE 250 star

I think software company Kainos (LSE: KNOS) is often overlooked by investors. The company has excellent revenue figures that have been growing steadily over the last decade.

Kainos provides solutions to improve communication and performance within companies. Given the digital work revolution in the last two years, it’s an area that has gained huge prominence. The company has a large client base including Netflix, Primark, ASOS and the NHS. This shows an established global presence in an incredibly competitive space.

Its shares have risen 62.5% in 2021 and an incredible 863% in the last five years. And I still think there’s a lot of room for growth, given the increasing need for digital workplace solutions.

But it operates in a very congested sector and competes with big names like Amazon Web Services and IBM. Also, given its share price explosion, it’s trading at a forward profit to earnings ratio (P/E) of 60x. But I’m not too bothered by the inflated valuation given the strong sustained financial performance. This is why I think Kainos looks like a much better tech pick for my portfolio today.

Explosive mix of IT and energy

I wrote about tech firm Aveva (LSE:AV) last month because of the its data-driven solutions for companies in the energy sector. Since then, the company has released the Aveva Data Hub, its own Software as a service (Saas) offering. This is part of its cloud computing division that works alongside the data solutions the company offers.

The company recently acquired OSIsoft for £3.8bn to improve its data services for clients like BP, GlaxoSmithKline and EDF. I think the energy sector will see some huge advancements in the coming years as fuel price hikes and coal shortages grip nations worldwide.

There are risks to consider when operating in an emerging area like data analytics. One new gamechanger could banish Aveva to obscurity. And that’s the ruthless world of tech. But the company invests heavily in R&D and I think the probability of this is very low. Compared to Darktrace, Aveva has a long history of excellent returns and an established international clientele which is why I think it’s a better fit for my portfolio.

The post Forget Darktrace’s share price! I’d buy these UK tech stocks instead appeared first on The Twelfth Magpie.

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The Motley Fool UK has recommended ASOS, GlaxoSmithKline, and Kainos. 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.

What is Darktrace?

Darktrace is a Cambridge-based cybersecurity firm that went public earlier this year. It specialises in protecting business data using advanced artificial intelligence technology to adapt and learn from the growing number of cyber threats coming from all around the world.

Tech companies like Darktrace have the potential to be extremely profitable. Often, they employ relatively small numbers of highly skilled workers to provide high-demand services to millions of people. This is part of why Facebook is worth so much.

Darktrace’s business model is subscription-based, unlike Facebook’s, but such a model is among the most reliable on the market. It locks in customers for long periods of time to services they become reliant on.

Why did the price rise so fast before?

Darktrace’s share price shot up after going public. It was first floated at 250p then climbed all the way to 985p. This is because the first half 2021 looked excellent for the company. It managed to bring in $281m in revenue for the period, an increase of 41.3%.

But this increase was mitigated somewhat by a sharply wider net loss of $149.6m due to non-cash finance costs. Darktrace claims that these losses ceased at the IPO, when all loan notes were converted to equity. 

Personally, I thought that most of the price action was driven by investor over-excitement. Everyone wants to be in on the next big thing in tech. Artificial intelligence are two words that have been thrown around a lot in tech circles for some time. We often hear about how AI and machine learning are already shaping our lives, but few of us fully understand what it is or how it works.

This was, initially, my main reason for staying away from Darktrace. I thought that we would see a price crash after early investors sold off their shares. It turns out I was wrong.

Should I buy the dip?

Darktrace has been an unusually volatile stock, both up and down. Even so, I’ll admit I was completely caught off guard by exactly how overvalued some analysts thought it was. One source put the share’s fair price at 330p!

Granted that’s just one analyst and it doesn’t mean the price will fall that low. In fact, Darktrace could well boom from here. But that 330p assessment is still a very far cry from the current price of 703p. I won’t be adding Darktrace to my portfolio.

The post I was right about the Darktrace share price. Is now the time to buy? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

James Reynolds 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.

Can this incredible momentum continue or is this now a ticking time-bomb? Let’s start by looking at why investors have been queuing up to buy.

Why the Darktrace share price has rocketed

Part of the reason for the huge rise in the Darktrace share price is the growing realisation of just how useful its tech is.

The company is a leader in the use of self-learning AI to help defend businesses against ransomware and cloud attacks. This is patently valuable since it takes some pressure off human security teams. To drive the point home, Darktrace was recently named as one of the most influential companies in the world by TIME magazine.

As one might expect from all this, the company doesn’t seem to have any problem attracting clients. Back in July, Darktrace announced it had ended its last financial year with roughly 5,600 customers. This reflects 42% year-on-year growth over the 12 months to the end of June. 

This is clearly good news for DARK’s top line. It now expects annualised recurring revenue (ARR) of $340m once foreign exchange fluctuations are factored in. That’s year-on-year growth of 44%.

But can this form continue?

It’s certainly possible. After all, the company’s already increased expectations for the current financial year. It’s now looking for the aforementioned ARR to be somewhere between 32% and 34% for FY22. That’s up from the 26.5% to 29.5% suggested at the time of its IPO.

However, no investment is risk-free. Despite it operating in a sector that’s likely to experience huge growth over the next decade, Darktrace’s success isn’t guaranteed.

My biggest concern relates to the valuation. Following its superb rise over the last few months, the business now has a market capitalisation of £4bn — almost 24 times forecast sales. Now, having optimistic investors is all well and good.

However, being priced to perfection can be problematic if a setback were to occur now. And all businesses encounter setbacks eventually. So if the valuation remains frothy then, yes, I think we could see a big drop in the Darktrace share price eventually.

However, there’s a chance of this happening in spite of whatever the company does. Concerns over rising inflation and the forthcoming stimulus taper in the US could really impact sentiment across global markets. In such a scenario, those companies that aren’t yet making profits, such as Darktrace, could be hit the most. 

There’s also the possibility early holders may want to bank some profit. We’ve already seen this happen before in highly promising UK-listed tech companies such as robotic automation specialist Blue Prism.

Buy on dips

I’m not sure the Darktrace share price is a ticking time-bomb. Even so, I’d be surprised if it doesn’t let off some steam soon. Whether this occurs next month (full-year numbers are confirmed on 15 September) or later down the line is hard to say. However, I’d need to give serious consideration to adding the company to my own portfolio if/when the opportunity to load up arises.

Short-term movements aside, I think Darktrace remains a very enticing growth play. 

The post Is the Darktrace share price a ticking time-bomb? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers 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.

The Darktrace (LSE: DARK) share price has now more than doubled since its IPO in April. That’s a huge boost for the London market’s ambitions to attract more tech-related firms. It also indicates just how important investors believe the cybersecurity theme will be going forward.

So, is it too late to buy the stock for my own portfolio?

The Darktrace share price: reasons to be wary

As an investment, Darktrace certainly appears to have a lot of promise. Its utilises what is known as ‘self-learning AI’. In practice, this means its software learns on the job. Picking things up from real-time data rather than from past cyber hacks is patently useful since it allows a company to respond so much quicker to threats. No wonder Darktrace has been so successful in attracting customers. 

There’s also a lot to be said for the positive momentum seen in the Darktrace share price to date. Along with value and quality, this is another factor that, historically, has been shown to deliver great investment returns.  

Notwithstanding this, there are a few things to be aware of. 

Arguably, the most important of these is that this company is currently unprofitable. This could make the Darktrace share price volatile as time goes by. If inflation keeps rising, investors will become less inclined to hold ‘jam tomorrow’ stocks because cash flows aren’t expected for some time. Moreover, Darktrace could be hit by another rotation into battered value stocks that stand to benefit the most from a post-pandemic return to normality.

Regardless of macro-economic issues, there’s also the growing possibility that some traders will simply want to lock in some profit after such as great run. The likelihood of this will surely increase if Darktrace indicates it’ll shortly need to tap investors for more cash to implement its growth strategy. 

A safer option?

An alternative to buying Darktrace is for me to pick an exchange-traded fund that tracks an index of cybersecurity companies. By far the most popular example on the UK market is the L&G Cybersecurity UCITS ETF (LSE: ISPY).

One big advantage to buying this fund is that it gives me instant diversification. This protects me to some extent if the market has a wobble. Moreover, the L&G fund is very liquid. In other words, it shouldn’t be hard for a holder to sell their shares if they really needed to. 

There are however, some drawbacks. The 0.75% ongoing charge is high for a passive fund. I wouldn’t need to think about fees like this if I just bought and held Darktrace stock. 

As you might expect, the recent performance also lags the Darktrace share price. Yes, a 24% gain over the last year is hardly a bad result. Nonetheless, it does endorse billionaire investor Warren Buffett’s belief that knowledgable investors can get better results by owning just a few companies, albeit at greater risk.

I’d buy the theme

On reflection, I’m happy to sit on the sidelines for now as far as this new-stock-on-the-block is concerned. A temporary pullback in the Darktrace share price looks pretty likely, in my opinion. 

Even so, I do think it’s clear cybersecurity will become one of the most popular investing themes of this decade. For me to get some exposure at some point would be prudent.

The post The Darktrace share price has more than doubled! Should I buy? appeared first on The Twelfth Magpie.

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Paul Summers 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.