Darktrace PLC (LON: DARK)

Darktrace PLC is an FTSE 100 listed global leader in cyber security AI. Moreover, it provides the first at-scale deployment of A.I. in cyber security and is a pioneer of autonomous response technology. The Company got recognized as TIME magazine's 'Most Influential Companies' for 2021. Currently, DARK has 1,600 employees and over 30 offices worldwide. 

Technological Advancements

(Source: Annual Report)

Growth Prospects (also covers AGM Statement released on 24 November 2021 and Q1 FY22 trading update released on 13 October 2021)

• Share Buyback Programme: The Company had started a share buyback programme of a maximum of £30 million on 07 December 2021. Moreover, it will last till 31 December 2022.
• Strong Customer Engagement: DARK has more than 5,900 customers, of which around 86% are using two or more Darktrace products. Meanwhile, Darktrace AI stops ransomware on average within one second, and Darktrace Antigena stops an attack every single minute.
• Positive Market Dynamics: As the risk of cyber-attacks increases, the demand for Company's product also increases. The company estimates the total Information Security and Risk Management 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.
• Positive Momentum in FY22: DARK had shown around 63.8% year-on-year growth in the net annualised Recurring Revenue (ARR) and impressive growth of about 8% in the total revenue during Q1 FY22.

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.
• Federal Reserve Meeting: The net loss had widened during FY21 when compared with the prior-year levels.
• Interest Rate Hike: The recent interest rate hike of 0.15% to curb inflation may keep investors’ away from UK Equities.
• UK Services PMI: The UK Services PMI fell sharply to 53.2 in December 2021 from 58.5 in November 2021.
• 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.

Summit DT Equity Holdings 3 LP is the most significant shareholder as it holds nearly 134.50 million shares as of 30 September 2021. 

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

(Source: LSE Website)

• Robust Top-line Revenue: Driven by growth across all geographic markets and contract sizes, the revenue of the Company increased by 41.3% on a YoY basis
• Operating Loss: There was a 54.7% increase in operating loss, mainly due to IPO related expenses and increased share-based payments.
• Significant Increase in Customers: The Company witnessed a 45.3% increase in customer base, largely because of the rising cyber-attacks.

Share Price Performance Analysis (since 30 April 2021)

 (Source: Refinitiv, Research done by Kalkine Group)

On 17 December 2021, at 09:00 AM GMT, DARK’s shares were trading at GBX 398.60, down by around 3.02% against the previous closing price. Stock 52-week High and Low were GBX 1,003.00 and GBX 250.00, respectively.

On a daily chart, the share price is hovering around the lower Bollinger band, indicating the possibility of an upward movement. Moreover, the MACD remained above the signal line, indicating an upside potential in the stock price. The 14-days RSI of ~32.53 approaches oversold territory, indicating a bullish price momentum.

Since listing, DARK stock has delivered a positive return of ~20.85%. Also, it has outperformed the FTSE All-Share Software and Computer Services Index (benchmark sector) with a return of negative 1.81% and the FTSE 100 index with a return of approximately 4.33%.

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Business Outlook:

DARK delivered an excellent performance in FY21, with revenues rising 41.30% on a YoY basis, and replicated the positive business performance into FY22 as well with robust year-on-year top-line business growth shown during Q1 FY22. As a result, the Company expects year-on-year revenue growth of between 37% and 39% during FY22, which was previously 35% to 37%, because of smaller-than-expected impact from foreign exchange headwinds during Q1 FY22. The management would focus on providing superior product services and the market expansion. On the profitability front, the Group expects an adjusted EBITDA margin for FY22 to remain between 2% and 5%.

However, the stock price may undergo sizeable corrections because of a surprise increase in the interest rates by the Bank of England and disappointing UK Services PMI figures for December 2021. Thus, it depends on the risk appetite of the clients to take a reasonable position in this Company having favourable market dynamics.

Considering the positive business momentum carried into Q1 FY22, its technological advancement, upgraded guidance, and support from the valuation as done using the above method, we have given a "BUY” recommendation on “Darktrace PLC” at the current market price of GBX 398.60 (as on 17 December 2021 at 9:00 AM GMT), with a lower-double digit upside potential based on 10.70x EV/NTM Sales (approx.) on FY22E sales (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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