Darktrace shares plunge again as investor lock-up ends

Shares dive by 13% as analysts raise doubts over cybersecurity firm’s valuation

Last modified on Mon 1 Nov 2021 10.40 EDT

Shares in the cybersecurity firm Darktrace have plummeted again after an analyst note raising doubts about its valuation and as the expiry looms of a lock-up on insiders selling their stakes.

The Cambridge-based firm, which had been a star performer since floating in April and joining the FTSE 100 last week, had a share price fall of more than 13% to 698p in early trading on Monday, valuing the company at £4.8bn.

Its shares first began to dive last week after an analyst note from Peel Hunt questioned its sky-high valuation. Darktrace, which uses artificial intelligence to create digital security products to keep businesses one step ahead of hackers and viruses, has lost £2bn from its market capitalisation within a week.

The company’s shares had come close to hitting 1,000p in recent weeks, valuing the business at nearly £7bn, quadruple the 250p it began trading at when it made its debut on the London Stock Exchange.

Darktrace’s latest share price fall – the largest in the FTSE 100 – comes as a 180-day lock on investors who were onboard at the flotation selling their shares ends on Wednesday.

Investors who could offload stakes include the British tech billionaire Mike Lynch, Darktrace’s first and largest shareholder pre-float, who sold the software group Autonomy to Hewlett-Packard for £8.4bn in 2011.

Lynch and his wife, Angela Bacares, own a 16.2% stake in Darktrace, worth about £780m, and are its second-largest shareholders.

Lynch is appealing against his extradition to the US, where he is accused of fraudulently inflating the value of Autonomy before its sale to HP, and also awaits judgment in a $5bn civil fraud trial brought by HP. He denies any wrongdoing in either case.

Last Monday, two days before Darktrace replaced Morrisons in the FTSE 100 after the acquisition of the supermarket chain by the US private equity group CD&R, an analyst note titled Reality Check by the city brokers Peel Hunt wiped more than a fifth of the company’s market cap.

The note warned that there was a “disconnect” between the company’s valuation and its growth prospects.

“While we believe strong growth rates will continue, we also see a disconnect between valuation and the ultimate revenue opportunity,” the note said.

“Having considered the potential market size, the intensifying competition, and Darktrace’s limited [research and development] spend, we take a more grounded approach to our valuation, giving a target price of 473p.”

Darktrace said revenues grew 50.8% year-on-year in the quarter to the end of September, significantly slower than the almost quadrupling in share price the company had enjoyed until last week.

The company was founded in 2013 by mathematicians from the University of Cambridge, artificial intelligence experts and cybersecurity specialists from GCHQ.

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