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Dark times for Darktrace: Can it woo back lost investors?

By Angelique Ruzicka

10:41, 13 April 2022

hand holding a phone with the Darktrace company logo
Is now the right time to invest in Darktrace? – Photo: Shutterstock

It’s been a year since Darktrace’s (DARK) initial public offering (IPO), but since its time as listed entity has been tumultuous.

The Cambridge-based tech darling got booted off the UK’s top index just a few months after it entered the FTSE 100, but since then, it has redeemed itself with significant customer and revenue growth.

However, there are now concerns that its current and future performance could be scuppered by competitors like Microsoft (MSFT), Amazon (AMZN) and Alphabet’s Google (GOOGL). So, what are its prospects?

A hot topic

Despite its volatile start on the stock exchange, Darktrace remains one of the fastest-growing cybersecurity firms. Founded in January 2013 by mathematicians and cyber-defence experts, it has made noticeable million-dollar deals and grabbed headlines to protect its customers.

In recent weeks, it has also secured and renewed several deals – including one with a multinational electronics corporation, a major airline and a global financial services company – and, more recently, deals with two NHS Trusts intended to prevent the healthcare system from hackers.

It’s warded off several cyberattacks, including a ransomware attack on a major French hospital and a sophisticated phishing attack on a Brazilian manufacturing giant.

The company has said it has garnered 1,854 new customers, of which 926 were won in the first couple of months in 2022.

Sophie Lund-Yates, lead equity analyst at Hargreaves, says: “Darktrace is obviously a hot topic. As a UK-based artificial intelligence [AI] specialist focused on cyber security, its attraction in today’s climate of constant cyber threat is easy to understand.

“Darktrace’s reach is huge – it works with well over 6,500 organisations across the globe. While the product is enviable, there are some concerns from an investment perspective.”

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Darktrace (DARK) share performance

Booted from the FTSE 100

The cybersecurity firm had a rocky start on the anniversary of its debut on the stock exchange. It listed in London at 250p in April last year, and its year-to-date performance shows it has gone up by just over 15%, currently trading at 451p.

However, investing in the company is not for the faint-hearted, as its share-price performance has resembled a very jagged mountain range over the past year. It peaked in September at 985p, but then tumbled down steadily from October last year.

It was booted from the FTSE 100 after this loss in momentum, which some attribute to a few large investors selling their shares around the same time. Not all blame the company and its managers for this. 

Dan Ridsdale, managing director at Edison Group, points out: “The shares have now substantially outperformed the All Share and technology indices with the shares up 82% from their IPO price of 250p, whereas the All Share is up 5.6%. 

“I wouldn’t say management has done anything wrong – the IPO was struck at a level that has made investors money. That the company has been removed from the FTSE 100 is due to the fact the business entered the index earlier than it should have, as the shares re-rated up in a frothy technology market.”

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However, this has not been the only concern from investors and market commentators.

Growth and other concerns 

This month the company’s shares fell after JPMorgan (JPM) gave it an ‘underweight’ rating over fears that rising costs could negatively impact on its profit growth.

Varun Rajwanshi, JPMorgan vice president, equity research, says: “With annual recuring revenue [ARR] growth tied to new customer acquisition and retention, costs are likely to challenge the company’s ability to deliver profitable growth.”

The company suffered another blow this year following British tycoon Mike Lynch’s resignation as an adviser. Lynch stepped down after Britain ordered his extradition to the United States to face criminal charges for fraud. He could face 20 years in prison if found guilty.

Fierce competition?

It is news such as this, and the threat of competition from Google, Amazon and Microsoft that has made market commentators less optimistic about Darktrace’s future.

A recent note from JPMorgan highlighted that “a growing list of vendors that seek to combine different point security solution offerings… will only increase the competitive intensity for Darktrace, whose offerings are a complement”.

Lund-Yates concurs there are concerns from an investment perspective: “The first is that it’s struggling to turn a profit on its annual revenues of £281m [$365.4m], and that makes it really hard to value the shares using preferred metrics. Risk is also elevated as there’s no buffer if things hit a rough patch.

“The other end to consider is [the] pretty huge political risk. Mike Lynch, Darktrace’s founding investor, has now been ruled against in both a fraud trial and also an extradition hearing. This sort of thing tends to control the share price, and that could make things bumpy for a while.”

However, not all concur with this sentiment. Ridsdale adds: “Operationally and financially, the company’s performance has been consistently exemplary.

“The business has delivered multiple upgrades to the extent that FY23 revenue and EBITDA [earnings before interest, tax, depreciation and amortisation] estimates are 24% and 354% higher than consensus immediately post-IPO, and the business is now expected to make a profit, whereas forecasts were for losses on listing.

“Darktrace looks like a high-quality technology business, which looks well placed to sustain growth at a high rate. Companies offering these characteristics will always trade at premium valuations and the rating is not demanding, given US peers offering similar characteristics.”

Only time will tell if the company can keep ahead of its rivals and keep rising costs from affecting its profits.

 

Markets in this article

GOOGL
Alphabet Inc - A (Extended Hours)
151.24 USD
-0.1 -0.070%
AMZN
Amazon.com Inc (Extended Hours)
180.06 USD
-0.31 -0.170%
DARK
Darktrace plc
4.3910 USD
0.1175 +2.770%
UK100
UK 100
7966.8 USD
18 +0.230%
JPM
JPMorgan Chase & Co (Extended Hours)
200.40 USD
0.84 +0.420%

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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