What We Can Learn From Darktrace’s Stock Plummet

What We Can Learn From Darktrace’s Stock Plummet

If you’re a follower of the stock market, you have probably come across the name ‘Darktrace’ at some point in the last two or three weeks. That’s because, in that short time frame, the company’s stock price has plummeted for the first time since it started trading in London in April. A huge chunk of this can be attributed to fears ignited when, towards the end of October, analysts from broker Peel Hunt called Darktrace (DRKTF) a “gimmick”. At the time, they predicted that the company is only worth half of its closing value of £6.6 billion (or $9.1 billion). Understandably, particularly in a market full of inexperienced investors and pandemic-induced caution, this analysis hit pretty hard. In this blog, I am taking a look at what has happened to Darktrace over the past few weeks in order to pinpoint what it is we can learn from it.

For a little context, I’ll start by explaining a little bit about Darktrace as a business. A UK-based cyber security company, Darktrace is a self-proclaimed “world leader” in Autonomous Cyber artificial intelligence (AI). Their products, of which they have four, are designed to interrupt cyber attacks as they happen, through their software’s autonomous response capabilities. Huge advocates of the power of AI in cyber security, Darktrace combines machine learning, AI and intelligence augmentation to form a product that is capable of producing an entirely autonomous response to any given situation – including a cyber threat. 

Darktrace began trading as DRKTF in April 2021 at a modest 250p. To the delight of its shareholders, it rose steadily throughout its 180-day lock-up period. By September it had hit 1003p. Then, on 25th October, broker Peel Hunt started coverage of the stock with a sell rating and a price target of 473 pence – implying that it was worth a measly 50% of its value at close three days earlier. Some Peel Hunt analysts even went as far as to call the company a “gimmick”. 

As you can imagine, panic ensued. By 1st November, shares had fallen by 26% in under two weeks. Investors felt they should quit while they were ahead and began cashing out in floods. Fears quickly rose that Peel Hunt’s words (and the ensuing drop in Darktrace’s stock value) would cast long shadows into the company’s future on the stock market. 

Two days later, on 3rd November, the company’s lock-up period ended. Now able to sell their assets and follow investors in getting out while they could still turn a profit, internal investors started dropping out. A major investor, private equity firm Vitruvian Partners, sold 11 million of its shares for £63.8 million ( just 580p per share). At an 8.3 percent discount from the previous closing price, this sent out major alarm bells. Immediately after this sale was announced, the stock dropped a further 5.1 percent, or 32.5p, to 600p. The plus side? This is still more than double their initial public offering, but it is alarmingly clear that there is not a lot of trust on the inside for Darktrace right now.

So what can we learn from all this?

Well, according to Nils Pratley, the Darktrace saga shows us that “nobody has a real idea of what cyber-fighting tech is worth”. But I disagree. We do know what it is worth, but we also know that, when it comes to revolutionary cyber-crime-fighting technology, Darktrace is just not where it’s at. The fact is that there is another UK-based cyber security company far more deserving of our attention (and our money). One that is currently amidst its lock-up and, given the contracts it has in the pipeline right now, one that will certainly not be facing the same issues when it comes to the end of it. 

Of course, I am talking about Arqit limited. Currently trading as ARQQ on the NASDAQ, Arqit is a far safer bet for those looking to invest in the cyber security space. Why? To start, they have years and years of pipeline contracts pre-signed and ready to go, worth over $1.1 billion. Their existing clients include the UK, US and Japanese governments, national defence organisations and Telecoms giants. A recently signed contract with Blue Bear Systems (which could solve the Department of Defense’s JADC2 problem, by the way) demonstrates the fact that their technology is being both tested and trusted where it matters most, at the line of defence for some of the world’s most influential countries. Their board is jam-packed with military veterans, tech giants and successful businessmen/entrepreneurs AND they are the only company to have found a way to distribute symmetric keys in a manner that allows the unparalleled symmetric key encryption to work at scale. Now if that isn’t enough reason to check out of Darktrace and into Arqit, I don’t know what is…

DISCLAIMER: I am not a financial advisor nor am I qualified in any way to give investment advice. I am just a punter with a keen interest in cyber security, a decent amount of research and a very strong opinion.

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