Darktrace Shares Are Up 8.84% Days After Short-Selling Report

The Darktrace PLC (LON: DARK) share price has rebounded after the company responded to the allegations made by short-selling hedge fund Quintessential Capital Management (QCM). The share price has risen 8.84% in the past two days after falling 12% on Monday ahead of the report and 3% on Tuesday after the report.

Quintessential Capital’s report accused Darktrace of inflating its sales numbers leading up to its IPO in April 2021 through dubious sales practices that may have led many to believe that the company was more profitable than it was. The claims made by QCM have some credibility, given Darktrace’s connection to Autonomy.

However, Darktrace has come out fighting and defending its sales practices by saying that it has robust systems to ensure that its resellers do not engage in dubious practices that inflate sales numbers. Still, the company’s revenue recognition policy leaves a lot to be desired. 

QCM pointed out that Darktrace spends almost 100% of its revenues on sales and marketing activities. In comparison, only 10% of its profits go to research and development activities, which raises questions about the company’s customer retention rates. 

While it is okay for a company to spend a significant amount of resources on acquiring new customers at the startup stage, the sales and marketing expenditure usually subsides once the firm has built an initial pipeline of customers who like its services and keep renewing their contracts.

However, a company with a high customer attrition rate would have to keep spending a significant amount of money to acquire new customers as old clients leave once their contract period ends, which raises questions about the robustness of Darktrace’s cybersecurity programs. 

Darktarce also commenced a new £75 million share buyback plan to boost its share price following the short-selling report. About £25 million of the shares repurchased will be used as part of its Employee Benefits Trust (EBT) scheme to meet its obligations to employees. 

The move seems to have worked as it stopped Darktrace shares from falling further, but the cybersecurity AI company’s share price is down 13.16% in 2023, bringing its losses over the past six months to 43%.  

*This is not investment advice. 

The Darktrace share price. 

The Darktrace share price is up 8.84% in two days from Friday’s closing price of 210.5p to its current price of 229.1p.