Can the Darktrace share price emerge from the shadows?

The Darktrace [DARK] share price has plunged more than 50% since its mid-October 2021 high, and has continued to struggle to make gains through the opening of 2022.

The British cybersecurity firm, which employs artificial intelligence (AI) to detect attacks and vulnerabilities within IT networks, has seen its technology touted by some analysts as a major long-term tailwind. Yet there remains much uncertainty about the substance of the business, which is exacerbated by the fact Darktrace is not legally permitted to name its clients.

Are “snake oil” and “pipe dream” allegations made by a short-selling fund legitimate problems, or is the company well placed to take advantage of its prospective tailwinds, including the increasing volume and severity of cyberattacks? And can that lead to the Darktrace share price turning around its troubled trajectory?

What’s happening with the Darktrace share price?

Darktrace’s market capitalisation hit close to £7bn in a matter of months following its 30 April 2021 IPO, with investors enticed by a European player within a largely US-denominated cybersecurity sector. Darktrace’s share price zoomed from its 250p IPO price to beyond the 600p level, in the process launching the stock into the FTSE 100 in September’s blue-chip index reshuffle.

Darktrace’s share price climbed higher still, hitting a peak of 1,003.00p on 24 September, but the euphoria of joining the UK’s blue-chip index only lasted until the following quarterly recalibration in December, as the shares plummeted, hit by a negative analyst note and the ending of a post-flotation lock-up that had prevented some investors selling. The Darktrace share price closed out last week at 377.00p, down 62.41% from last autumn’s high. 

Darktrace share price gets “reality check”

Darktrace continues to be questioned due to both lingering doubts about its technology, and legal issues surrounding its founding investor. Broker Peel Hunt began coverage of Darktrace with a bang last October, warning of a “disconnect” arising from Darktrace’s fast-rising valuation. Its ‘Reality Check’ titled note even said some customers described its products as “snake oil”, reports the Guardian. Peel Hunt analyst Oyvind Bjerke believes Darktrace’s slick marketing operation is covering for the quality of its products, saying: “There is something of a disconnect between the marketing material and the real value you get from it”.

Peel Hunt is not alone in casting doubt over the company, after the short-selling fund Shadowfall’s Matthew Earl warned of a business based more on sales style than substance, and said its model was “watery-thin”.

The company’s connection with its second-largest shareholder, Mike Lynch, is also an ongoing issue, though the company has previously stated this is “low risk”. Lynch is fighting extradition to the US on fraud charges relating to the 2011 sale of the business he co-founded, Autonomy, to Hewlett Packard [HPE].

Adding to the negative sentiment and putting further pressure on the Darktrace share price, the company is yet to make a profit, with its adjusted full-year earnings forecast to be just $30m, resulting in a $147.6m pre-tax loss, reports the Guardian. Motley Fool’s Roland Head said, “If growth stalls, I’d expect the stock to crash”.

Guidance upgraded after strong half-year figures

The company unveiled impressive results for the six months to the end of December last month, sending Darktrace’s share price up 14.03% to 450.20p on the open, before it ended the day 6.89% higher at 422.00p. Revenue rose by “at least 50%” to “at least $190m” year-on-year, while customer numbers jumped 39.6% to 6,531, and the closely-watched recurring revenue metric rose by “at least 45%”. As a result of the stellar numbers, the company raised its full-year revenue guidance to grow between 42% and 44%, up from 37%-39% previously.

Motley Fool’s Roland Head notes, “Darktrace has generated average revenue growth of 50% every year since 2018”, and “appears to be on track to maintain that impressive record this year”. He’s bullish on the stock, saying that “although I’m normally cautious about investing in loss-making tech stocks, I’m excited about the growth potential of this Cambridge-based firm”.

Market potential set to explode

The positive news for Darktrace is that the cybersecurity market has huge growth potential. Head says, “the last few years have seen an explosion in cyber crime, such as ransom attacks and data theft”, and as a result, he reckons “the market for the firm’s services is about to get much bigger.” With AI-based functionality key to Darktrace’s offering, the firm is well set to meet the demand for more intelligent services that can understand network activity and recognise potential threats, says Head, who also points out that the metaverse is likely to see more business and personal data move online.

The company also has plans to penetrate the US market, by extending its sponsorship to Indycar racing, adding to its existing multimillion-pound deal with Formula One racing team McLaren, reports the Guardian. Head concludes that “if Darktrace can continue to deliver on its growth forecasts, then I think the share price could perform strongly in 2022 and beyond”.

What’s next for Darktrace’s share price?

Jefferies equity analyst, Charlie Brennan, is bullish on the Darktrace stock’s potential, saying, “I don’t see any scenario where attackers get any less aggressive going forward, and that is a key growth driver for cybersecurity businesses”, reports the Guardian.

Brennan adds: “In Europe, at scale, Darktrace is the main player for investors. All Darktrace has done is deliver good news since the float – better numbers than expected, raised guidance, churn rates have fallen and net retention rates [among clients] is rising.”

Peel Hunt, which triggered October’s share price slide with that Sell rating, upgraded its outlook to Hold following January’s upbeat results, with a price target of 473p.

“In Europe, at scale, Darktrace is the main player for investors. All Darktrace has done is deliver good news since the float – better numbers than expected, raised guidance, churn rates have fallen and net retention rates [among clients] is rising” - Jeffries equity analyst, Charlie Brennan

Berenberg Bank is the most bullish of the brokers with a 1,000p price target, arguing that “Darktrace’s shares have clearly been caught in a web of misinformation.” Overall, analysts have two Buy ratings and one Hold on the Darktrace share price, with a consensus average 12-month price target of 648.67p, according to MarketBeat.