Darktrace PLC (LON: DARK)

Darktrace PLC is an FTSE listed world-leading provider of A.I. for the enterprise, with the first at-scale deployment of A.I. in cyber security and a pioneer of autonomous response technology. A team of Mathematicians create the system; its platform uses machine learning and A.I. algorithms to neutralize cyber threats across various digital estates, including the cloud and networks, IoT and industrial control systems.

On 1 September 2021, the Company announced that it had become a Microsoft Intelligent Security Association (MISA) member.

Darktrace Innovations and Technology

(Source: Annual Report) 

Growth Prospects

• Huge Market Opportunity: As the risk of cyber-attacks increases, the demand for Company's product also increases. The Company estimates that its current bottom-up TAM amounts to approximately $41 billion, reflecting a substantial global greenfield opportunity for Darktrace to capitalize on to sustain its strong growth. The Group also considers a top-down TAM approach considering the overall Information Security and Risk Management market, which Gartner, a global research and advisory company, estimates to amount to approximately $150 billion in FY21.The company estimates the total market to grow at a compound annual growth rate of 10.8% from 2020 to 2025 on a constant currency basis, providing a massive opportunity for the Company to grow and cement its position as the market leader.

• Unique Technology: The Company operates on a self-learning A.I. platform, and it is the only solution available to counter all the digital threats. In seconds, Darktrace's Self-Learning A.I. technology detects infiltrations that bypass existing security architecture, including unique, zero-day assaults, whether internal or external. As a result, it can make autonomous decisions on securing an organization's systems and contain an incident at a lightning pace.
• Multi-Product Services: The clients of the Company buy multiple products at the initial point of purchase, and the Company is building a base of customers to upsell as new products are added to the current portfolio. On 30 June 2021, 62.2% of customers had three or more products, and 39.2% had four or more products from its current ten product platform.
• Strong Financial Performance: Darktrace is a high-growth business operating in a fast-evolving cyber security market. The Group's revenues increased by 41.3% in FY21, resulting in an FY18-21 CAGR of 52.4%. In addition, over 99.5% of the revenue comes from subscription-based contracts, which typically last for three years, indicating that the growth momentum will continue in the near term.

Key Risks 

• Product innovation: Failure to develop and enhance its platform to adapt to the increasingly sophisticated cyber-attacks could impact customer retention and financial growth.
• Legal Risk: Failure to protect its intellectual property, the actions of its people and the nature of its business associations, litigations could adversely affect the Group’s reputation.
• Highly Competitive Industry: The Group faces competition from large organizations or companies with more resources, impacting the market share and customer base.

Now we will analyze some key fundamental and shareholders statistics of Darktrace PLC.

Financial and Operational Highlights (for 12 months ended 30 June 2021 as of 15 September 2021)

(Source: LSE Website)

• Driven by growth across all geographic markets and contract sizes, the revenue of the Company increased by 41.3% on a YoY basis
• The adjusted EBITDA increased by 233.3% on the back of a significant reduction in travel and entertainment costs from COVID-related global travel restrictions.
• There was a 54.7% increase in operating loss, mainly due to IPO related expenses and increased share-based payments.
• The constant currency AAR increased by 45.7% on YoY basis due to a lower base in FY20 amid Covid-19.
• The Company witnessed a 45.3% increase in customer base, largely because of the rising cyber-attacks.
• R&D headcount increased yearly by 47.9% to 241, including a core development team that increased by 97.2% to 140.

Financial Ratios (H1FY21)

Share Price Performance Analysis (since 30 April 2021)

 (Source: Refinitiv, Research done by Kalkine Group)

On 17 September 2021, at 8:35 AM GMT+1, DARK’s shares traded at GBX 833.50, up by 1.89% against the previous closing price. Stock 52-week High and Low were GBX 922.00 and GBX 250.00, respectively.

On a daily chart, the share price is sustaining above 20-day EMA of about GBX 695.30, indicating the possibility of an upward movement. Moreover, the MACD remained above the signal line, indicating an upside potential in the stock price.

Since listing, DARK stock has delivered a positive return of ~163.94%. Also, it has outperformed the FTSE All-Share Software and Computer Services Index with a return of ~6.30%.

Valuation Methodology: Price/Book Approach (NTM) (Illustrative)

Business Outlook:

DARK delivered an excellent performance in FY21, with revenues rising 41.30% on a YoY basis. The significant reduction in travelling and other cost-saving measures resulted in a 233.30% growth in FY21. The management remained focused on providing superior product services and the market expansion. As a result, the Company expects year-on-year revenue growth of between 35% and 37% which was previously 29% to 32%, on the back of higher ARR of between 34% and 36%. The management also expects that approximately 45% to 46% of its revenue and net constant currency ARR added will be recognized in H1 FY22. On the margins front, the Group expects an adjusted EBITDA margin for the year of between 2% and 5% (previously 1% to 4%).

Considering the Company's robust financial performance, its technological advancement, upgraded guidance, favourable market drivers, and support from the valuation as done using the above method, we have given a "BUY” recommendation on “Darktrace PLC” at the current price of GBX 833.50 (as on 17 September 2021, at 8:35 AM GMT+1), with a lower-double digit upside potential based on 27.96x Price/NTM Book Value per share (approx.) on FY21 book value per share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

*All forecasted figures and Peer information have been taken from Refinitiv.

*The reference data in this report has been partly sourced from Refinitiv.

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