Darktrace is a well-oiled sales and marketing machine, as smooth and turbocharged as the multimillion-pound McLaren Formula One sponsorship deal it uses to attract potential customers, and yet the cybersecurity company continues to be overshadowed by questions about its technology and its founding investor.
At first glance, Darktrace is a great British technological achievement. It was founded in Cambridge nine years ago by an alliance of mathematicians, former GCHQ spies and artificial intelligence (AI) experts. Its market value soared to nearly £7bn within months of its IPO last April, as investors clamored for a stake in the promise of a rare European superpower in the US-dominated cybersecurity space. United.
And yet Darktrace has been on a roller coaster ride since then. The meteoric rise in share price after the IPO that quickly lifted Darktrace to the FTSE 100 only lasted three months until a wave of negative sentiment sent the company’s market value down by its peak of £10, relegating it from the premium index of blue chip listed companies. in London.
Yesterday it became the biggest bear on London’s FTSE 250 market – plummeting nearly 15% or 62p to close at 362p – as the flight to safety sparked by the Ukraine crisis and jitters over the Broader revaluation of mostly U.S.-based tech stocks prompted investors to turn to safety. skeptical view of his activity.
Earlier this month, short seller Shadowfall, which reportedly has a small short position in Darktrace, became the latest critic to weigh in after an update from Darktrace investors led to a momentary spike in its shares – a a strategy that one analyst dubbed a deliberate “beat and raise” strategy to show consistent outperformance.
Matthew Earl, who runs the Shadowfall fund, joined analysts Peel Hunt in questioning Darktrace’s model and culture, warning clients in a note that the company’s model is “liquid” and based more on the selling style than on the substance of the business.
“What usually frustrates me is that there always seems to be an essentially one-sided view of these things,” Earl says. “No one really cares about the risks associated with this kind of business. With Darktrace, there are a plethora of risks that simply haven’t been properly assessed. the [positive] the commercial update did not deter us. I’ll let time and gravity take its course. We have done a lot of homework on this company. And we keep looking from other angles, our thesis is broad.
The company has long become accustomed to dealing with ongoing issues regarding Mike Lynch who, along with his wife, Angela Bacares, is Darktrace’s second largest shareholder, and of which Invoke Capital was the company’s first and largest shareholder.
The Autonomy co-founder continues to fight extradition to the US, where he is accused of fraudulently inflating the company’s value ahead of its £8.4bn sale to Hewlett-Packard in 2011 – a charge he denies. Lynch’s spectrum is large, with much of Darktrace’s leadership built by former Autonomy staffers – from chief executive Poppy Gustafsson and chief technology officer Jack Stockdale to head of strategy and development Nicole Eagan. of artificial intelligence – and the ongoing case against him keeps the UK cybersecurity industry in the news for all the wrong reasons. In its listing filing documents, Darktrace rated the potential liability from the fallout from the action against Lynch as “low risk.”
The most pressing concerns for Darktrace are the questions that have been raised about the company’s cybersecurity technology and its potential scale.
About 60% of Darktrace staff work in sales and marketing, according to Berenberg. Its safety products are touted as the digital equivalent of the human body’s ability to fight disease – they can ‘self-learn and self-heal’, function as a ‘corporate immune system’ and have an “autonomous response capability” to deal with threats. uneducated as they are detected.
However, a lengthy primer on the cover published by Peel Hunt in October – titled ‘Reality Check’ – warned of a ‘disconnect’ between Darktrace’s valuation then nearly £7bn and the size of its addressable market. The memo, which included some customers describing Darktrace’s AI-focused products as “snake oil”, wiped out a fifth of the company’s share price.
“There’s a kind of disconnect between marketing material and the actual value you get from it,” says Oyvind Bjerke, the analyst who wrote the Reality Check note. “There is no doubt that they are extremely good at marketing, their presence is very well known. However, it is more difficult to realize how good the technology is.
“Darktrace is very good with customer service, but does it make up with sales and marketing for some of the technology gaps? We are now reevaluating that Darktrace is close to our target price. Some cybersecurity software is vital, [but] Is Darktrace an asset or something that companies will consider essential? Right now, I think it’s somewhere in between. I estimate that around a third of companies will end up getting something like what Darktrace offers.
The company argued that much of the rating is inaccurate while Berenberg, the most optimistic of analysts with a target price of £10 per share, said “Darktrace shares have clearly been caught in a web of disinformation”.
Still trading well ahead of its 250p IPO price, Darktrace tried to focus on letting its performance silence the critics. In a statement, the company highlighted that revenue was up 50% and that it had signed more than 6,500 customers by the end of 2021, a 40% year-over-year increase. However, profitability remains elusive, with adjusted annual profits forecast at just $30 million – falling to a loss of $147.6 million on a pre-tax basis.
Darktrace, which is unable to name customers, claims to have won one of the largest airlines in the world, one of the largest European automotive companies, one of the top 10 telecommunications players in the Americas and one of the largest investment management companies in the world. “As of last report, 86% of Darktrace customers used multiple of its products,” the company said. “And, according to an independent Berenberg survey, 65% of Darktrace users contacted expect to spend more money with the company.”
While the argument about the size of Darktrace’s addressable market may remain moot — the company claims it’s worth up to $41 billion while others peg it at possibly $7 billion — it doesn’t. there is no doubt that the sector could have enormous growth potential.
A source close to the company said the discovery of the Log4j software flaw late last year, described as the “most critical vulnerability of the past decade” that potentially puts millions of web servers across the world at risk. the world, is a “perfect example of why Darktrace was built”.
“They’re great in those circumstances, the ability to be able to detect malicious activity,” the source explains. “As for Shadowfall, it’s a short seller, it’s about driving the stock price down, right.”
Charlie Brennan, an equity analyst at Jefferies, who has an 800p target on the stock, and is his co-broker with Berenberg, said: “I don’t see any scenario where forwards become less aggressive going forward, and c is a key growth engine for cybersecurity companies.
“In Europe, on a large scale, Darktrace is the main player for investors. All Darktrace has done is deliver good news since the flutter – better numbers than expected, forecasts increased, churn rates declined, and net retention rates [among clients] is increasing. “Customers see the value of Darktrace which is backed by won contracts. Enterprises, in general, want more layers of security, not less, and are willing to pay for a differentiated approach from vendors.
And as for Darktrace’s high-octane marketing strategy, it adds to the McLarendeal by extending its sponsorship to Indycar racing as it seeks to take on its American cybersecurity rivals on its home turf.