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Why the Darktrace share price fell 40% in November

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In November, the worst performing FTSE 100 stock was Darktrace (LSE:DARK). The Darktrace share price fell 40%, to end the month at 465p. Clearly, this was a large drop for a company that only went public this spring. Having seen a strong lift higher in the summer, the shares are in a firm downtrend, with the company in danger of dropping out of the FTSE 100. 

Early stage investors selling out

One reason for the fall in Darktrace shares has been the end of the lock-in period for investors related to the IPO. Usually, when a company goes public, the early stage investors have an agreement where they can’t sell their shares for a period of time. Common periods include six or 12 months after the IPO date. This is a protective measure to prevent share dumping as soon as it goes public as investors try and cash out.

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Although the lock-in is good for the initial period, it can be an issue when it ends. This has been the case for the Darktrace share price. The six month grace period ended in November. Several large investors chose to sell shares as this finished, causing a large amount of pressure on the share price.

Some could argue that this is an artificial move on the shares. It might not reflect the long-term trend of the business. However, if early investors are choosing now as the time to cash out, it should sound some alarm bells.

Negative broker report

Another reason for the dump in November was a continuation of the fall from late October following the release of a report by broker Peel Hunt. It caused the Darktrace share price to fall 15% in a week, as I wrote about in early November

The report forecast a fall in the shares to 473p, at a time when it was trading around 800p. This is a level that has been met in recent days.

Concern was raised around two main points. Firstly, Peel Hunt said that “we…see a disconnect between the valuation and the ultimate revenue opportunity”.

Secondly, it said that “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”. This grounded approach turned out to be a target price of 473p.

The impact of the report rolled into November as investors digested the full contents.

The share price in December

The regular quarterly review of the FTSE 100 constituents will be concluded in coming days. This will see a reshuffle, with potential demotions based on market capitalisation. Given the fall in the share price, Darktrace could slip to the FTSE 250.

This could put further pressure on the shares as funds that can only hold FTSE 100 stocks need to offload their shares. The move to the FTSE 250 isn’t guaranteed, so we’ll have to wait and see what happens in December.

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Jon Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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