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Darktrace IPO reflects strong product offering, but challenges remain


Is there anyone who has not heard about the Darktrace (LON:DARK) IPO? Shares in the AI cyber defence company, which were priced at 250p, shot up around 40% when they launched on Friday 30 April. At time of writing, they are at a comfortable, but not ecstatic, 323p per share.

We all know that one of the major shareholders, Mike Lynch, has been charged in the US for his role in the sale in 2011 of Autonomy to Hewlett Packard, and that Invoke Capital, which Mike Lynch founded and which seed-funded Darktrace in 2013, may be liable for money laundering offences arising out of its historic funding by Invoke.

So, apart from what the firm describes as potential “reputational risk arising out of unlawful, and allegedly unlawful, activities,” what is Darktrace and does it deserve all the hype?

Darktrace, the business and products

Darktrace, which was founded in 2013, sells B2B cyber security products to protect email, the cloud and SaaS among others. It covers threats such as industrial espionage, IoT networks and industrial systems complexes, zero-day malware, data loss, and supply chain risk. Its self-learning AI is modelled on the human immune system and according to the company, its broad approach stands in contrast to traditional siloed solutions, which create perimeters around specific components, which can leave exploitable gaps in protection.

Over 4,000 organisations use the software and Darktrace has customers in more than 100 countries although they are mainly from the US (39%) and Canada (22%) but 18% are also from the UK. Birmingham Airport and Prudential use Darktrace’s Enterprise Immune System, Hydrotech, a US industrial tech provider uses Darktrace’s Cyber AI for its cloud and SaaS and even the Vatican Library uses Darktrace AI to protect it from cyber-attacks.

The firm offers a range of products, all of which can be used on one unified, simple to use platform via a customisable dashboard. The Enterprise Immune System and Industrial Immune System use self-learning AI technology to spot the subtle signals of sophisticated attacks. The Cyber AI analyst product augments human cyber security teams, by automatically triaging, interpreting and reporting on security incidents.

The Darktrace USP

But it is Darktrace Antigena that appears to have the leading edge. The product covers Network, SaaS and Email products and it can interrupt and neutralise a threat in seconds. For example, Antigena may strip the active parts from an email attachment, sever an unusual FTP connection or block access to Office 365 from an anomalous IP range.

Its actions are grounded in Darktrace’s core AI engine which uses autonomous response technology. The system does not rely on traditional rules and signatures to help detect and defend attacks but is aware of subtle deviations that reveal novel or targeted attacks. Decisions are made in real time and are continuously evolving based on dynamic observation of attacks as they unfold. The board at Darktrace believes it is the first solution to use autonomous response to interrupt detected attacks.

Sophisticated threat landscape

Despite its USP and notwithstanding the reputational issues, there are some notable challenges for the firm. Firstly, Darktrace has incurred losses each year since inception, including net losses of $42.5 million, $34.7 million and $28.7 million for the financial years ended 30 June 2018, 2019 and 2020, respectively. For the six months ended December 2020, Darktrace made a loss of $48.4 million.

Secondly, this is a crowded market – Darktrace must compete with cyber security companies such as IBM, Broadcom (Symantec), Cisco and McAfee as well as the likes of Honeywell, Kaspersky and CyberX.

There is also a very real risk that other platform vendors could restrict their access to customer data in clouds, networks, collaboration tools and email. Darktrace acknowledge this in the fundraising prospectus.

Nevertheless, the directors of Darktrace believe their fundamental technologies set them apart from others in the market and at this stage of the game, it looks as if investors agree with them.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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