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Darktrace is a well-oiled sales and marketing machine, as slick and turbocharged as the multimillion-pound McLaren Formula One sponsorship deal it uses to entice prospective clients, and yet the cybersecurity company continues to be overshadowed by questions about its technology and founding investor.

On the face of it, Darktrace is a great British tech success story. It was founded in Cambridge nine years ago by an alliance of mathematicians, former spies from GCHQ and artificial intelligence (AI) experts. Its market value hit almost £7bn within months of its stock market float last April as investors clamoured for a stake in the promise of a rare European superpower in the US-dominated cybersecurity space.

And yet Darktrace has been on a rollercoaster journey since then. The meteoric share price rise post-IPO that rapidly elevated Darktrace to the FTSE 100 lasted just three months until a wave of negative sentiment pushed down the company’s market value from its £10 peak, relegating it from the premium index of blue-chip companies listed in London.

Yesterday it became the biggest faller on London’s FTSE 250 market – crashing almost 15% or 62p to close at 362p – as the flight to safety triggered by the Ukraine crisis and jitters over the wider reassessment of mostly US-based tech stocks made investors turn a sceptical eye to its business.

Earlier this month, short-seller Shadowfall, which is understood to have a small short position in Darktrace, became the latest critic to weigh in after a Darktrace investor update that led to a momentary spike in its shares – a strategy one analyst has dubbed a deliberate “beat and raise” strategy to show consistent outperformance.

Matthew Earl, who heads the Shadowfall fund, has joined analysts Peel Hunt in calling Darktrace’s model and culture into question, warning clients in a note that the company’s model is “watery-thin” and based more on sales style than business substance.

“What frustrates me generally is there always seems to be a mostly one-sided view of these things,” says Earl. “No one really addresses the risks associated with these sorts of businesses. With Darktrace there is a plethora of risks that have simply not been properly assessed. The [positive] trading update has not deterred us. I’m going to let time and gravity take its course. We have done a lot of homework on this company. And we are still looking into other angles, our thesis is broad.”

The company has long become used to dealing with the ongoing questions about Mike Lynch who, along with his wife, Angela Bacares, is Darktrace’s second-largest shareholder, and whose Invoke Capital was the company’s first and biggest shareholder.

Mike Lynch leaves the Rolls Building in London following the civil case over his £8.4 billion sale of his software firm Autonomy to Hewlett-Packard in 2011.
Mike Lynch leaves the Rolls Building in London following the civil case over his £8.4bn sale of his software firm Autonomy to Hewlett-Packard in 2011. Photograph: Dominic Lipinski/PA Archive/PA Images

The Autonomy co-founder continues to fight extradition to the United States, where he is accused of fraudulently inflating the value of the company before its £8.4bn sale to Hewlett-Packard in 2011 – a charge he denies. The spectre of Lynch looms large, with much of the management of Darktrace built from ex-Autonomy staff – from chief executive Poppy Gustafsson and chief technology officer Jack Stockdale to Nicole Eagan, chief strategy and artificial intelligence officer – and the ongoing case against him keeps the British cybersecurity industry in the press for all the wrong reasons. In its stock market listing registration documents Darktrace rated the potential liability relating to the fallout of the action against Lynch as “low risk”.

More pressing concerns for Darktrace are the questions that have been raised about the company’s cybersecurity technology and how big it can get.

About 60% of Darktrace’s staff are in sales and marketing, according to Berenberg. Its security products are pitched as the digital equivalent of the human body’s ability to fight off illness – they can “self-learn and self-heal”, operate as an “enterprise immune system” and have an “autonomous response capability” to tackle threats without instruction as they are detected.

Darktrace chief executive Poppy Gustafsson.
Darktrace chief executive Poppy Gustafsson. Photograph: Darktrace

However, a lengthy coverage initiation note published by Peel Hunt in October – titled “Reality Check” – warned of a “disconnect” between Darktrace’s then almost £7bn valuation and the size of its addressable market. The note, which included some customers describing Darktrace’s artificial intelligence-focused products as “snake oil”, wiped a fifth off the company’s share price.

“There is something of a disconnect between the marketing material and the real 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 harder to realise how good the technology is.

“Darktrace is very good with service to clients, but are they compensating with sales and marketing for some of the technology shortfalls? We are reassessing now that Darktrace is close to our target price. Some cybersecurity software is vital, [but] is Darktrace a nice-to-have or something businesses will see as critical? Right now I think it is somewhere in between. I’m estimating around a third of businesses will end up getting something like what Darktrace offers.”

The company has argued that much of the note is inaccurate while Berenberg, the most bullish of analysts with a £10 a share target price, have said that “Darktrace’s shares have clearly been caught in a web of misinformation.”

Still trading well ahead of its 250p price at flotation, Darktrace has tried to focus on letting its performance silence the critics. In a statement the company highlighted that revenues are growing at 50% and it had signed up more than 6,500 customers by the end of 2021, a 40% year-on-year increase. However, profitability remains elusive, with adjusted annual earnings forecast to be just $30m – sinking to a $147.6m loss on a pre-tax basis.

Darktrace, which is unable to name clients, claims to have won one of the world’s largest airlines, one of Europe’s biggest automotive companies, a top 10 telecommunications player in the Americas and one of the world’s largest investment management firms. “At last reporting, 86% of Darktrace’s customers used multiple of its products,” the company said. “And, according to an independent survey by Berenberg, 65% of Darktrace users contacted expect to spend more money with the company.”

While the argument over the scale of Darktrace’s addressable market may remain debatable – the company says it is worth as much as $41bn while others put it at perhaps $7bn – there is no question the sector could have huge growth potential.

A source close to the company said that the uncovering of the Log4j software flaw late last year, described as the “most critical vulnerability of the last decade” that potentially puts millions of web servers across the world at risk, is a “perfect example of why Darktrace was built”.

“They are great in these circumstances, the ability to be able to detect malicious activity,” says the source. “As for Shadowfall, they’re a short seller, it’s about depressing the share price, isn’t it.”

Charlie Brennan, an equity analyst at Jefferies, which has an 800p target on the stock, and is its joint broker along with Berenberg, said: “I don’t see any scenario where attackers get any less aggressive going forward, and that is a key growth driver for cybersecurity businesses.

“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. “Customers see value in Darktrace that is being backed up with contract wins. Companies, broadly speaking, want more layers of security, not less, and are willing to pay for a differentiated approach from suppliers.”

And as for Darktrace’s high-octane marketing strategy, it is adding to the McLarendeal by extending its sponsorship to Indycar racing as it looks to take on its US cybersecurity rivals on home turf.