It’s been a wild ride for Darktrace (LSE:DARK) shares over the past year. Even though the stock is down 41% over this period, it has experienced sharp moves higher as well as lower. Yet after all of the takeover chatter and latest financial results, I struggle to see the Darktrace share price going anywhere but lower. Here’s why.
Downward pressure in the past year
The business has struggled to give potential investors like me much reason to cheer. One reason for this is that even respected institutional investors are staying clear.
Thomas Bravo (a private equity company) was considering buying the business last autumn, but pulled out. This decision coincided with the release of the full-year results, and although we don’t know the official reason for the business walking away, I think it was tied to details of the results.
Whatever the reason was, after conducting due diligence Thomas Bravo decided not to pursue the deal. The Darktrace share price fell 28% when this was announced.
As recently as last month, other firms were taking a more aggressive approach. A large US-hedge fund is shorting the stock, meaning it will profit if the shares fall. It has released a 69-page document going through the perceived failings at Darktrace.
A tough road ahead
The trading update in January revised down the firm’s full-year guidance. It cited “macro-economic uncertainty” and said that “late in the second quarter, it became clear that the [negative] impact on new customer growth had been larger than expected”.
As an extension of this, my concern is that the business mostly targets small-to-medium sized entities (SMEs). With the UK economy not in a great spot, these are specifically the types of businesses that will cut back on anything but essential spending. Therefore, I think Darktrace could struggle to grow its client base in this area.
From the current price of 245p, the next level I’m watching to see whether it drops to again is the 52-week low of 198p. This would put the market cap at around £1.4bn. Given the company’s net assets and projected revenue growth, I’d struggle to see the market cap going below £1bn. Therefore, I think the lowest it could go before becoming undervalued would correspond to a share price of 142p.
Risks to my view
Of course, it’s not all doom and gloom over at Darktrace. The business is still forecast to grow revenue by a double-digit percentage this year. The adjusted EBITDA margin is also expected to rise from a range of 15%-18% to between 16% and 18.5%.
It Darktrace can carry this momentum forward and get some good analyst reports from banks and brokers, it could shake off the negative news coverage. This would all support the share price moving higher.
Ultimately though, I feel the share price could drop below 200p in coming months, so I won’t be investing now.
