Alliance News25 Oct 2021 11:44
(Alliance News) - Peel Hunt started coverage on Darktrace with a Sell rating amid concerns over intensifying competition, limited research & development spend, and controversy around the cybersecurity provider's products.
The broker placed a 473 pence price target on the stock. Darktrace shares were down 17% at 780.50p, the worst performer in the FTSE 250 index on Monday.
The Anglo-American firm was founded in 2013 with the goal of applying artificial intelligence to take on the ever-growing challenge of cybersecurity. Its approach differed from traditional cybersecurity solutions, which were based on defending against known threats.
Darktrace sought to to use anomaly detection, where its software learns what is considered 'normal behaviour' within the organisation, and then responds when it sees anything which could potentially be a threat. As such, detection of new types of attacks and the appropriate response is faster than from a human analyst, lowering the risks to the organisation.
The Cambridge, England-based firm listed on the Main Market of the London Stock Exchange in April with an initial public offering price of 250p, giving the company a market value of GBP1.70 billion upon admission.
With its current market capitalisation standing at GBP6.01 billion, Darktrace will replace Wm Morrison Supermarkets in the FTSE 100 when the grocer de-lists on Wednesday following its takeover.
Darktrace's Enterprise Immune System uses proprietary machine learning and AI algorithms to build a so-called "pattern of life" for every network, device, and user within an organisation. It then employs correlation techniques to classify and cross-reference these models, establishing a highly accurate understanding of 'normal activity' within that particular environment.
Its products can be grouped into in three categories: Network Detection & Response, email security, and beyond cybersecurity.
Peel Hunt's Oyvind Bjerke and James Lockyer highlighted Darktrace has shown excellent growth over the past few years,and is operating in a sector poised for strong demand for many years to come.
However, the analysts said Darktrace's success is driven more by its sales strategy than its product strength.
"Its growth has been driven by its powerful go-to-market strategy, targeting the need for companies to strengthen their cybersecurity defences. While we believe strong growth rates will continue, we also see a disconnect between the valuation and the ultimate revenue opportunity. Having considered the potential market size, the intensifying competition, and Darktrace's limited R&D spend, we take a more grounded approach to our valuation, giving a target price of 473p. This implies 50% downside," the pair said.
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