The Darktrace share price just collapsed! Should I load up?

The Darktrace share price dropped 15% on Wednesday morning after a senior director of the cyber security specialist was linked to a legal row.

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Darktrace (LSE:DARK) shares plummeted on Wednesday morning. The fall followed a report that named a Darktrace executive in a legal row concerning Autonomy’s 2011 sale to Hewlett Packard. The stock is now trading near its lowest ever levels. So, maybe it’s time to load up?

What’s behind today’s fall?

The Telegraph reported on Tuesday evening that a current Darktrace executive has been named in a judgement concerning malpractice in the sale of Autonomy to Hewlett Packard in 2011. The judgement — handed down on Tuesday — found that Autonomy’s central management had pulled accounting “levers” to misrepresent how well the Cambridge-based business was doing ahead of its sale.

Justice Robert Hildyard highlighted Nicole Eagan, then Autonomy’s chief marketing officer, as “part of a clique responsible with the defendants of the operation of the impugned levels”. Eagan left Autonomy to set up Darktrace with a number of other tech experts. He served as chief executive until 2020, before moving to become Darktrace’s chief strategy and AI officer.

The judgement also accuses Mike Lynch, who founded Autonomy and served as an advisor to Darktrace until earlier this year. The judge accused Lynch of over-inflating the firm’s value, and he now faces a civil case. The British entrepreneur denies all claims made against him.

Autonomy was bought by HP for $11.7bn. However, one year later, the US tech giant wrote down the value of the business by $8.8bn. It claimed the selling price for the business had been massively over-inflated.

What does this mean for Darktrace?

In theory all this has little impact on Darktrace. However, investors will be concerned that a top executive may have been involved in malpractice that saw a company’s valuation distorted. This may compound worries that already existed about Darktrace’s share price. The stock has jumped up and down since its IPO with investors unsure of its real value.

Should I buy Darktrace?

Recent updates from and about Darktrace have been rather positive. For a start, in April, the AI firm increased its annual revenue guidance after adding 359 net new customers in the third quarter. Darktrace said it added $35.4m of annual recurring revenue (ARR) in Q3 and $105.3m in the nine months to the end of March. These figures include the acquisition of Cybersprint in March.

This was followed by a positive broker appraisal. Analysts at Jefferies issued the cyber-defence company with a ‘buy’ rating, noting the group’s “positive” third-quarter trading statement. Jefferies has a 730p target for the stock, more than double today’s price.

However, there are concerns about the path to sustainable profitable growth. Shortly before the Q3 update, JPMorgan Cazenove raised noted that high competition, relatively low platform lock-in and customer stickiness could hurt long-term profitability.

Despite this, and the other concerns, I see today’s fall as a good opportunity to buy. There’s a considerable focus on cyber-security following Russia’s invasion of Ukraine and the increasing tensions between Moscow and the West. I think the prospects are strong for Darktrace and I’m looking to add it to my portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has no position in any of the shares mentioned.  The Motley Fool UK has 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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