The Darktrace (LSE:DARK) share price fell by around 7% on Tuesday morning after JPMorgan Cazenove initiated coverage of the shares at “underweight“. And the cybersecurity firm has seen its share price fluctuate hugely since it was listed a year ago.
What did JPMorgan say?
So what does that “underweight” rating mean for the Cambridge-based information technology company? The term suggests that the company’s stock price will not perform as well as the benchmark index. The investment bank claimed that Darktrace’s path to sustainable profitable growth was unclear, sending the share price down.
While JPM recognised that Darktrace led the Network Detection and Response market and had seen some early success with its email product, it said that there were challenges ahead. The US bank said it expects customer acquisition and retention to become more challenging, citing changing market conditions.
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It also registered concern about Darktrace’s ability to perform against high competition and potential commoditisation of security solutions.
“High competition and low customer stickiness will likely translate to higher customer acquisition costs and prompt Darktrace to increase investments in existing and new product development,” the bank said. It thinks that both of these factors will limit Darktrace going forward. It added that this will ultimately challenge the company’s ability to deliver profitable growth.
JPM set a target price of 400p for the stock.
Darktrace volatility
As I write, the Darktrace share price sits around 420p. There has been considerable volatility in its first year of trading, bouncing massively amid conflicting company valuations. On April 30 last year, the company’s shares were made available at an issue price of 250p. This meant they valued the cybersecurity firm at £1.7bn.
However, its share price quickly rose beyond that and even reached a high of 1,003p in September. It then fell massively in the following months. The considerable drop came in late October when Peel Hunt published a note saying it was overvalued.
One issue for the firm is that it is yet to post a full-year profit. The share price rose several times on positive customer and revenue data, but that is yet to be translated into full-year profit. The McLaren F1 team sponsor was also been criticised for offering too much style over substance.
However, the company did return a half-year profit in the period leading up to December. And despite the aforementioned challenges, there has been an explosion in cyber crime and data theft in recent years. This trend is likely to continue, and could be exacerbated by increased tensions between the West, Russia and China. If this holds true, Darktrace should benefit from growth in the sector.
Establishing a credible valuation for this stock is one reason why I’m steering clear of it. It could well soar in the coming years. But as an observer, I’d like to see it post a full-year profit before I consider buying in.
