Darktrace (LON: DARK) shares should be booming by the usual systemic measures. Revenue is climbing by tens of percentage points a year – sure, there are still losses but the revenue should catch them – and Darktrace is in the sexy field of cybersecurity. But the shares are not booming, so why is this? It’s possibly the hangover from the Autonomy debacle.
The market, The City, is just placing less belief on announcements of revenues, contract wins and so on, than the activity itself might justify. It could be said that Darktrace isn’t helping itself with this morning’s announcement of a “million-dollar deal” with an electronics company. What is a $300 million (and climbing) revenue company doing making an announcement like this over a third of one percent of revenue? That’s hardly a material number requiring – requiring that is – shareholder notification.
Darktrace’s basic business proposition looks absolutely fine on the face of it. Yes, cybersecurity, it’s the big thing. Work on it by marking out the organisation’s network, where traffic is, where the entry points are. Then set AIs to monitor for change in patterns. That’s what AIs are good at, pattern recognition. That basic strategy sell seems just fine. Revenues are rising nicely, we should be watching a new shooting star of a share price.
We’re not though and Autonomy is the reason. Mike Lynch has now resigned from Darktrace but he was a founding shareholder and driving force at the company. As he was at Autonomy. That company did well, then was sold to HP. Who have been complaining bitterly ever since and have launched varied lawsuits – one of which Mike Lynch has just lost the case against extradition to have to go and face.
Stripped of all the evidence and detail, the claim against Autonomy is that the company was too aggressive in recognising revenue. Some hardware sales might have been booked as software, deals that would probably be signed were counted as signed in this period. Leave aside whether this was true or not this then creates a problem for Darktrace.
For, from the same stable, same driving founder, is Darktrace being similarly – but not criminally, of course – aggressive in revenue recognition? Are we being told lovely stories of the near future rather than being given an accurate picture of the present? Again, whether that’s true or not isn’t quite the point, it’s what other investors believe might be true that is.
The net effect of this is that Darktrace isn’t being given the valuation that the objective numbers might support, On the grounds that no one’s really sure that they are objective – or at least a discount is being applied to the numbers being given. This might be horribly unfair, it might not be, it’s just one of those things that is though.
This isn’t being aided by this announcement today. A company must report material events to the stock exchange and thus shareholders. But a “million-dollar” contract to a $300 million revenue business isn’t one of those. So, why the report and is this just future revenue being talked up?
At some point, the problem will be solved of course. Actual recorded cash revenue will catch up with indications of sales and contract values or it won’t. At which point we’ll know whether forecasts and revenue claims were aggressive or not.
Darktrace’s share price is unlikely to reach the levels that claimed performance would objectively support until that worry over how aggressive revenue recognition is are assuaged.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.