Darktrace share price slide driven by 'fear not fact', says Berenberg

(Sharecast News) - Darktrace shares surged following heavy losses last week, as Berenberg reiterated its 'buy' stance on the cybersecurity firm and said "any share price capitulation is a result of fear not fact".
Shares in the company tumbled last month on the back of a Peel Hunt research note, in which the broker said there was "a disconnect between the valuation and the ultimate revenue opportunity".

However, Berenberg said a visit to Darktrace's headquarters in Cambridge last week confirmed its confidence in the group. The bank said it was shown "extensive product demonstrations and came away with a better understanding of the product and its real-world applicability".

"Management indicated that, while the focus is still on winning new customers, there has also been more focus on upsell campaigns also. These are being created by the company's strategic marketing teams and are feeding account executives with more granular information on customer needs to drive upsell," it said.

"This, coupled with churn reducing because of an enlarged customer success team, should enable the net retention rate (NRR) rates to continue to trend upward."

Berenberg's forecast that NRR will be fairly constant seems increasingly conservative, it said, particularly as management confirmed its two new product categories - Prevent and Heal - will be launched by the end of 2021 and 2022 respectively.

The bank said claims that Darktrace has underspent on R&D were refuted by management, who reiterated that its existing technology does not require models to be updated by large-scale cybersecurity teams and that the AI technology is "ubiquitous", meaning it can be used across the firm's different products.

"This naturally lowers R&D spend on a relative basis. This was brought home by seeing it in person, along with the pride of the technical staff in how it is achieved," Berenberg said.

It also noted that according to Glass Door, the average salary of a software engineer at Darktrace in Cambridge is roughly half that of West Coast cyber peers, highlighting the difference in R&D expenditure.

"The argument that Darktrace is underspending on R&D therefore appears to ignore the context behind this figure," it said.

Berenberg has a 1,000 price target on the stock.

At 1150 GMT, the shares were up 10% at 635.50p.