Darktrace PLC (LON: DARK) is a good example of how stock markets may not be entirely fair. Or perhaps the way in which we as investors might not be entirely fair in the way we evaluate companies like Darktrace. The problem here is the hangover from the Autonomy story. Perhaps that shouldn’t be there, perhaps it should, but it definitely is.
Darktrace as a company looks very interesting indeed. We all know that cybersecurity is ever more important as the world connects. Using the insights from the intelligence community to check upon that security, as Darktrace does, makes sense (and Palantir hasn’t done badly doing something similar with the US intelligence services insights in a slightly different field). Even the essential idea, that one should map the network and then monitor for variances is sensible. This is, after all, how both accounting and management plans work – look for the variances to see where things are going wrong.
It’s even true that AI is the right way to look for such variances. This is exactly and precisely what AI is good at, pattern recognition. So, Darktrace seems to have the technological ducks lined up in a row. Why wouldn’t we be excited by such a share?
Well, the market has been excited at times and less so at others. This explains the roller coaster ride since flotation. It also explains why the Darktrace share price jumped more than 10% over the past two days.
The specific cause of the latest jump is a trading update for the half-year ended 31 Dec. A 39.6% rise in the number of customers, at least 50% growth in revenue. Churn (how many sign up but then leave to be replaced by new customers) is down therefore repeating revenue is up. That last is important because there are costs to gaining new customers which you don’t have to carry if you’re retaining old ones.
All of which is great but if it is so great then why isn’t the share price at Darktrace soaring? Well, it might, yet, but there is this problem hanging over Darktrace and that’s Autonomy. Which is where we might say that stock markets can be unfair.
Mike Lynch was involved at Autonomy, is at Darktrace. Both are the application of whizzy if slightly black box AI and pattern recognition techniques to masses of data. But there’s significant controversy about Autonomy. Specifically, after the sale to HP there have been allegations – stoutly denied – of aggressive income recognition accounting. So much so that court cases are still in the system all these years later.
Now, the truth or not of the allegations is not the point here. That they’re still floating around is. The Darktrace share price is held back by some in the market wondering. Doesn’t really matter quite what they’re wondering about either – uncertainty will hold back a share price against more objective measures of success.
And that’s what the Darktrace share price problem is. There are two entirely unrelated issues. One is the performance of Darktrace itself. The other is the connection with Autonomy and how the varied court cases are going there. How these two balance out will likely be the determinant of the future Darktrace price. This might not even be fair but it is what it is.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.