NEWSLETTER
Image source: Getty Images
Shareholders of cybersecurity company Darktrace (LSE: DARK) have had a tumultuous few years. Between a high point in 2021 and a low point last year, Darktrace's share price fell by three-quarters.
However, today (April 26), shares are up 20% in early trading. Because?
A public takeover offer. US investment firm Thoma Bravo announced that it had reached an agreement with Darktrace management to take over the British company at a price equivalent to £6.20 per Darktrace share (at current exchange rates).
Darktrace shares soon reached nearly that level, suggesting the city expects the cash deal to go through.
Does this make sense for Darktrace shareholders?
Darktrace has been on the list for less than three years. In that time, its revenue growth has been impressive.
Source: TradingView
But, in my opinion, at the earnings level things have been less impressive. technology companies often like somewhat obscure metrics to communicate their business performance. In fact, I've often found Darktrace reports difficult to understand for that reason.
Just as revenues have improved markedly in recent years, so has EBITDA (earnings before interest, taxes, depreciation and amortization).
Source: TradingView
Although I tend not to pay too much attention to EBITDA. Costs like interest and taxes are real, so why exclude them from the financial evaluation of a company's performance?
Instead, I would pay more attention to core earnings per share. This measure has, in my opinion, two attractions. First, it doesn't exclude real business expenses like interest. Second, looking per share rather than a total means the impact of any share dilution is more obvious.
In terms of core earnings per share, again, the company has made considerable progress in recent years.
Source: TradingView
Still, the company has a very limited track record of profitability. Based on its most recent full-year earnings per share, the price-to-earnings ratio for Darktrace stock is 46. That's much higher than I'm comfortable with, and it's one of the reasons I haven't bought the stock. in any moment.
Where do things go from here?
However, Thoma Bravo clearly sees the value. That will no doubt lead to other companies using their slide rules on Darktrace and another bidder may emerge, driving up the share price even further.
Although that is not guaranteed. It is also not certain that Thoma Bravo's bet will be successful. These types of situations always involve risks, such as regulatory authorization not being granted.
If that happens, Darktrace's share price could fall again.
Rating always matters!
If the offering is successful, some investors will do well. Those who had bought earlier this year, for example, would now see an 80% paper return.
But what about long-term investors who bought when the stock hit highs in 2021? Now they are looking at a paper. loss of 35%.
In a takeover situation, if the offer is successful, shareholders usually have no choice but to accept. They have to take the loss even if they believe the stock price would increase if the company could remain independent.
This is a salutary lesson for all investors about the importance of never Overpaying for shares!
