The wider markets may still be reluctant to engage with growth stocks given the geopolitical backcloth and worsening inflationary environment, yet we believe that the rapidly improving fundamentals of Darktrace (DARK) demand attention.

The company’s third quarter to 31 March 2022 update was the fifth time in succession it has raised its guidance. That means every single trading update since it joined the stock market a year ago has been accompanied by good news.

Darktrace reported third quarter annual recurring revenue of $462.6 million, 46% year-on-year, while lifting its earnings before interest, tax, depreciation and amortisation margin from a range of 10% to 12% to a new range of 15% to 17% for the fourth quarter.

Since Darktrace floated in April 2021 investment bank Berenberg has increased its 2023 and 2024 annual recurring revenue forecasts by 27% and 32% respectively, while original EBITDA estimates of $10 million and $23 million respectively now stand at $80 million and $98 million.

Emerging as one of the world’s most innovative cybersecurity companies, Darktrace uses behavioural analysis to detect the early signs of a cyberattack on a network. You only need spin through the news to see just how rapidly the cybersecurity market is growing as governments and organisations throw money at it.

The US cybersecurity market was valued at $156.5 billion in 2019, yet by 2027 that is expected to have grown to $326.4 billion, according to forecasts by Grand View Research.

Darktrace is starting to consistently deliver rampant growth while improving its ability to generate more money per customer through upselling.

To sustain this momentum the company may have to bolster its sales teams, which may not be easy or cheap to do given the relative shortage of skills. Investors also need to watch client churn, which has typically run at around 7% a year.

Details on upselling and churn are not published quarterly so we’ll have to wait for full-year results in September for further detail.

The share price has been volatile in its short stock market life and that may continue over the coming years which means this is not a suitable investment for nervous individuals.

A sell-off in the past six months has left the shares trading up to 70% cheaper than peers such as Zscaler (ZS:NASDAQ), Okta (OKTA:NASDAQ) and Crowdstrike (CRWD:NASDAQ) on an enterprise value to sales basis, says Berenberg.

Use the current share price weakness to take a position in Darktrace as the stock could fly once the market stops worrying so much about inflationary pressures and rising interest rates.

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