Made in Britain cyber security tech business Darktrace (DARK) has seen a boom in investors buying the stock, sparking a 15%-plus two-day surge in the share price to a 967.5p record.

Driving this new bout of enthusiasm for the Cambridge-based company is an increasing feeling within the investment community that Darktrace is a genuine long-run growth business with significant capacity for shareholder value creation.

Darktrace is one of the world’s fastest-growing cyber defence companies and a leader in Enterprise Immune System technology, a new category of cyber solutions based on pioneering Bayesian mathematics developed at the University of Cambridge, a mathematical way of applying probabilities to statistical problems.


Nudging up revenue guidance certainly helped the market mood. In a statement on Wednesday, 13 October, Darktrace steered the market to expect growth of between 37% and 39% this year to 30 June 2022. That guidance was lifted from the previous 35% to 37% range and now implies revenue of $385 million to $391 million this year, or roughly £281 million to £285 million.

Part of the reason behind the firmer revenues rise is currency related, with Darktrace admitting that foreign exchange has put less pressure on its financials than expected.

But the market has also rewarded Wednesday’s strong first quarter to 30 September figures. Darktrace saw a 43% jump in customers to 5,975 and a 46% hike in ARR, or annualised recurring revenue, to $382 million, with $24 million added in the quarter. Total revenue in the first quarter jumped 51% to $93 million.


But before racing out to join the army of buyers, investors might consider a few things. First, growth to date has been driven almost exclusively by new client wins. What we don’t have much detail about is customer retention and gross churn.

This would tell us more about whether the company is able to extract extra value out of the existing customer base after that initial sale, or whether this is just an ‘endless hamster wheel of new logos,’ as Megabuyte analyst Indraneel Arampatta put it.

Profits, or the lack of them is something else to mull. Consensus forecasts, based on Refinitiv data, point to pre-tax losses of around $22.5 million to $23.5 million for this and the next two years despite rampant revenue growth, with operating costs hikes to match. In the June 2021 year Darktrace posted operating costs of $301 million, but this is set to more than double by 2024 to more than $630 million, according to analysts.


A final factor, valuation. Since its 250p, £1.7 billion London listing in April 2021 the stock has surged. Its’ 287% rally since listing is by far the biggest jump of any FTSE 350 company, versus the 350 index’s 10% year-to-date gain.

The company is now worth £about £6.3 billion. Stripping out the $307 million of net cash it had at the end of June, Darktrace is trading on an EV/Sales (enterprise value to sales) of 18.7 this year’s anticipated $344 million revenue.

As Shares concluded in our August 2021 Under the Bonnet feature, a lot could go awry, and we think there is likely to be quite a bit of share price ups and downs over the months ahead as news flow and trading updates emerge. This possibility of intense share price volatility may leave many investors uncomfortable to back the business.

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Issue Date: 14 Oct 2021