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Darktrace: what is behind the plunge in cybersecurity specialist’s shares?


When artificial intelligence-powered cybersecurity company Darktrace (LSE:DARK) listed on the London Stock Exchange in April, it was full of promise, with its stock surging 43% on the day.

The company, valued at £1.7bn at opening, seems to have lost its shine for investors as worries over its valuation and potential stock sales have frightened shareholders. The share price peaked in September, nearly quadrupling from its 250p open to little more than 1,003p. It is now down to 578p.

The main culprit for the price fall was an analyst report from Peel Hunt, which indicated that the stock was worth only half its value at the time. They added that for some experts, the group’s products were seen as a “gimmick”.

Peel Hunt noted: “Having considered the potential market size, the intensifying competition, and Darktrace’s limited R&D spend, we take a more grounded approach to our valuation, giving a target price of 473p”.

In the last 30 days, Darktrace’s share price is down nearly 35%.

But it is not just the Peel Hunt analysis that is hurting Darktrace

It is true that the cybersecurity sector is becoming increasingly more crowded, with competition for innovative products to counter new threats heating up. According to some estimates, the global cyber security market is expected to exceed $330bn by 2027. And Darktrace has many competitors, including CyberX, Vectra AI, CrowdStrike and Kaspersky.

In addition to the negative impact of the Peel Hunt analyst note, the shares also fell as the 180-day lock on investors at the IPO ended. Among those set to sell were private equity firm Vitruvian Partners, one of the largest shareholders in the company, which was looking to offload 11m shares worth about £70m.

Despite the rising competition in the sector and claims that the company is overvalued, there was another analyst report out last week that took on a more positive note.

Berenberg to the rescue?

The share price recovered somewhat after Berenberg analysts said the movements were driven by fears not facts. Analyst Benjamin May reiterated a buy recommendation on the stock with a target price of £10, following a visit to the company’s headquarters in Cambridge.

Darktrace, founded by Poppy Gustafsson, reported a year-on-year revenue growth of 41.3% to $281m for the year ended 30 June, and a loss of $150m, up 421.7%.

Susannah Streeter, senior investment and markets analyst, told The Armchair Trader: “There is still the lingering hangover of the recent broker downgrade of Darktrace which is putting pressure on the company share price, but the end of the lockup period has accelerated the sell-off. Early investors in the company including Deep Defence are reported to have had plans to sell off chunks of their holdings. New shares flooding the market will have provoked further falls.”

She added: “Darktrace is not alone in being a former IPO darling, now experiencing the pain of being jilted by investors. Trustpilot shares also plunged as the lock in period ended. Moonpig, The Hut Group and Dr Martens have also experienced a share slide shiver, as investors appear to have lost confidence in the expectations laid out in their IPOs’ prospectuses.”

Since the IPO on 30 April, Darktrace’s share price is still up nearly 75%.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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