Stock market

Darktress’s share price rose 20% today. Here’s why!

Image source: Getty Images

Shareholders of cybersecurity company Darktrace (LSE: DARK ) have been in turmoil for a few years. Between a 2021 high and last year’s low, Darktrace’s share price fell by three-quarters.

Today (April 26), though, shares jumped 20 percent in early trading. Why?

A takeover bid. US investment firm Thoma Bravo announced that it has reached an agreement with Darktrace Management to take over the UK firm for £6.20 per Darktrace share (at current exchange rates).

Darktrace shares soon rebounded to nearly that level, suggesting Citi expects the cash deal to go ahead.

Does it make sense for Darktrace shareholders?

Doctorates have been registered for less than three years. In that time, its revenue growth has been impressive.

Source: TradingView

But at the income level, things have been less impressive in my view. Tech firms often prefer some obscure metrics to communicate their business performance. Indeed, I have often found doctorates’ reports difficult to understand for this reason.

Just as revenue has improved significantly in recent years, so has EBITDA (earnings before interest, taxes, depreciation and amortization).

Source: TradingView

I don’t pay much attention to EBITDA though. Expenses such as interest and taxes are real, so why exclude them from a financial assessment of a company’s performance?

Instead, I’ll focus more on underlying earnings per share. In my view, this move has two attractions. First, it does not exclude real business expenses such as interest. Second, looking per share rather than total means that the impact of any share decline is more apparent.

Looking at the underlying earnings per share, again, the company has been growing quite a bit over the past several years.

Source: TradingView

Still, the company has a very limited track record of profitability. Based on its most recent full-year earnings per share, Darktrace shares have a price-to-earnings ratio of 46. This is more than I am comfortable with and is one of the reasons why I have never bought shares.

Where do things go from here?

However, Thoma Bravo clearly sees the value. This will no doubt lead to other companies running their slide rules on Darktrace and another bidder may emerge, driving the share price even higher.

It’s not guaranteed though. Nor is it certain that Thoma Bravo’s bid will succeed. Such situations always involve risks such as not getting regulatory clearance.

If that happens, the Darktrace share price could fall again.

Value always matters!

If the bid is successful, some investors will do well. Those who bought at the start of this year, for example, will now be sitting on an 80% paper refund.

But what about long-term investors who bought in when shares hit a high in 2021? They are now looking at a paper. loss of 35%.

In a takeover situation, if the bid goes ahead, shareholders have no choice but to accept. They suffer losses even if they believe that the share price will rise if the company can remain independent.

This is a salutary lesson for all investors about the importance of Never Paying more for shares!


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