What’s Next for Darktrace? Can DARK Snap Out of its LSE Freefall in 2022?

Darktrace had been billed as a success story after its April 2021 listing on the London Stock Exchange accelerated 98.48% within five months to a peak price of 985p. However, questions over the company’s valuation and efficiency caused the cybersecurity firm’s stock to tumble. After DARK’s investor lock-up ended, the company’s share price fell further. 

2022 started with an air of cautious optimism for Darktrace, so could London’s fallen angel deliver more promising results for the year ahead? 

As we can see from DARK’s performance on the LSE, the stock is by no means a failure when looking at the bigger picture. Compared to its debut, Darktrace has grown a little over 27% at the time of writing. 

However, it’s clear to see that the stock’s performance has been marred by a 57.44% downturn from its September peak. 

“The Darktrace share price has fallen 55% from its peak of 985p in September 2021. Investors clearly grew overexcited after its blockbuster IPO in April,” writes James Reynolds for Motley Fool. 

“While the company’s revenue and earnings outlook are improving, I think they still don’t yet justify the share price. I like to invest in tech stocks because of their scalability and critical role in the modern economy. But I think there are a couple of other options that would be better for my portfolio.”

Despite Reynolds’ scepticism surrounding DARK’s value, the stock has opened 2022 a little livelier than Q4 of 2021. 

Darktrace owes its upturn in fortunes to a 39.6% rise in its customer base and a 50% increase in its revenue. The company also achieved impressive results in its constant currency Annualised Recurring Revenue (ARR), of which Darktrace expected its year-ending ARR to reach at least $426 million, representing growth of more than 45%. 

As a result of its growing customer base, Darktrace anticipates that the company’s 2022 financial year will see a year-on-year increase in its constant currency ARR of between 37% and 38.5%. 

To further supplement its growth, Darktrace has also made inroads in strengthening its product line and forecasters believe that recent innovations will aid the company in winning fresh custom throughout the year ahead. 

“I am very pleased that we have continued to deliver strong growth across our customer base, ARR and revenue in 1H FY 2022,” said Darktrace CFO Cathy Graham. 

“We also achieved our aim of driving improvement in churn and net ARR retention rates over the past six months by leveraging our customer success team and focusing on upsell programmes.”

Could Darktrace Recapture Former Glories in 2022?

Despite a 55% decline in late 2021, the outlook for Darktrace can still be regarded as positive for the future. The company has generated average revenue growth of 50% since 2018 and this trend isn’t showing any signs of slowing down today. 

Revenue has risen by 50% in the second half of 2021 in comparison to the year prior, whilst customer numbers increased by almost 40% over the same period. Recurring revenue also climbed 45%.

Significantly, recurring revenue is a key sign for emerging cybersecurity companies because it indicates that customers are content enough to maintain their subscriptions over time. 

The key issue that Darktrace faces refers to the cost of its shares, and whether excitement for its LSE listing clouded investor judgements in creating a bubble surrounding DARK’s price. At a price of around 414p, DARK is listed at around seven times its forecast revenue for 2021/22, and analysts expect the company to report a loss for both 2022 and 2023’s financial years. If the company’s growth shows signs of slowing down it could be bad news for the stock itself. 

In the short term, Darktrace’s stock may also be impacted by the company’s historic association with tech entrepreneur Mike Lynch, who’s currently facing extradition to the United States on fraud charges relating to a previous business. Although it’s believed that Lynch no longer has any direct involvement in Darktrace. 

As we continue to accelerate towards digital transformation, the market for Darktrace’s services is likely to get bigger. With this in mind, the future looks bright for the stock – however, it remains to be seen just how heavily shares in DARK were inflated in the summer of 2021. 

Another indicator that Darktrace may see its stock pick up in 2022 could be an LSE revival as more stock listings attract investors to London. Firms like Monzo, Raspberry Pi, Huel, and BrewDog may opt to list on the London Stock Exchange over the coming year in what could be a watershed moment for an exchange looking to become a lure for modern startups. 

“Brewdog postponed its IPO in October 2021, which could now take place in 2022 or 2023. Officials say the company cancelled its IPO because of the pandemic, but they also note the scandals surrounding the company amid employee discrimination and conflict with buyers,” noted Maxim Manturov, head of investment advice at Freedom Finance Europe, highlighting that 2022’s new wave of listings may come with a fresh set of challenges similar to those faced by Darktrace.

Darktrace’s stock may have taken a battering in late 2021, but its fundamentals remain strong. As a longer-term bet, DARK may grow to offer some upside for investors.