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Here’s How Darktrace Could Get Hit By Short Selling Pressure

Tim Worstall
Tim Worstall trader
Updated 17 Jan 2022

Key points:

  • Darktrace has recently risen on the back of encouraging sales forecasts
  • Darktrace is also facing significant short selling pressure
  • The short sellers seem concerned over the Darktrace “corporate culture”
  • Darktrace Shares Are Booming Again

Darktrace PLC (LON: DARK) shares have surged then ebbed back since the flotation in April last year. With a high at 1003p and a low at 250p, the current price of 417p could be thought to go either way.

As we’ve said before about Darktrace the basic idea seems sound. We all know that in our ever more interconnected world cybersecurity becomes more important. Hardly a day goes by without someone’s system being penetrated. AI is excellent at pattern recognition – that, to a useful level of accuracy, is what AI does – and if a network is mapped out then monitored for changes then that should be a good guide to whether someone’s trying or able to get in.

The base idea is logical. The analyst at Piper Sandler thinks this story works and the share price at Darktrace should be 50% up from where it is.

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OK, that’s one view. But clearly, there are those with different views on Darktrace otherwise the share price would already be 50% up. That difference being certain of London’s short sellers. ShadowFall is very bearish on Darktrace. They’ve had a short position since October although it’s not large enough that they’ve had to declare it.

The problem is the reputational hangover from Autonomy. Mike Lynch has been heavily involved in both companies. Autonomy didn’t work out well for HP when it bought it and the court cases are still reverberating around the system. There is much argument about what actually happened, from nothing, just normal business that was misunderstood by HP, through the very much more significant allegations.

A fair middle path is to say that Autonomy’s revenue recognition was at the aggressive end of the allowable spectrum. Much of the ShadowFall case is that much the same is happening here at Darktrace. As they say “ShadowFall highlighted dozens of Autonomy staff who have since worked at Darktrace and said it had “cultural concerns” after a review of employee feedback on the website Glassdoor.”

There’s absolutely nothing that can be pointed at other than this vague unease over the corporate culture idea. If – if – Autonomy was aggressive in sales and revenue recognition then perhaps Darktrace is too? Further, recent interest in the Darktrace share price is a result of forecasts about sales and revenues and… is all a bit wishy washy as a series of accusations but it is ShadowFall’s money to spend as they wish.

The question for us as traders is, well, who is right here? Have we a good and sensible idea doing well but overshadowed by incorrect beliefs concerning Autonomy? Or is there good reason to be a little worried about revenue projections?
A possible solution is that the production of more audited results – something that will happen with time – will resolve the question one way or the other. We could then expect a breakout of the Darktrace share price – but in which direction?

Tim Worstall
Tim Worstall is a freelance writer specialising in economics and the financial markets.