I commented on Darktrace (LSE: DARK) shares just a few weeks ago. This was after the cyber security company had released a trading statement, which was the first main news release from the firm since it made its debut on the stock market.
Darktrace shares have had a good run since its initial public offering or IPO earlier this year. But I still don’t think the stock is worth buying for my portfolio. And I don’t think the recent news looks good for the company. Here’s why.
Mike Lynch is an investor in the firm. In fact, according to the the company’s IPO prospectus, he had a 4.5% stake in Darktrace. At the time of the listing, Lynch was fighting an extradition request made by the US Department of Justice on various criminal charges. I mentioned this as a potential risk when I first covered the stock in May.
The problem is that last week a London court said that he can be extradited to the US to face charges including fraud and conspiracy. This all goes back to when he sold his firm, Autonomy, to Hewlett Packard in 2011. Lynch is facing allegations that he fraudulently inflated the value of Autonomy before selling it to the US computer giant.
Lynch denies these criminal charges. He can still appeal the court ruling on extradition, but this doesn’t bode well for him.
What does this mean?
In a nutshell, this isn’t good news for Darktrace shares. As I said, Lynch is still an investor in the firm, with a 4.5% stake in the business. This all creates uncertainty, which is something the market doesn’t like.
If convicted, Lynch could be forced to sell his portion of the company. This would created negative pressure on the stock. But I reckon even the uncertainty surrounding his criminal charges after last week’s court ruling could mean volatility for Darktrace shares.
In my opinion, the best way would be for the firm to cut all ties with Lynch. But that’s easier said than done. The company did warn prospective shareholders of the risks involved in its prospectus.
Darktrace highlighted that it “may face reputational damage” and a “potential liability” relating to Lynch’s criminal charges. If this does happen, the consequences for the company could be damaging. Especially now that it’s a public listed entity and everything will be out in the open.
This follows the company’s short but sweet trading announcement earlier this month. It was encouraging and Darktrace even upgraded its forward guidance. This is certainly what an investor wants to see. Darktrace shares jumped on the positive release. So from a trading perspective, the firm has been doing well and is growing at a rapid rate.
Would I buy?
I don’t think Darktrace shares are worth buying for my portfolio yet. The stock is already trading at a high level and any more negative news regarding Lynch is likely to hit the stock. For now, I’m steering clear but I’m watching very closely. Especially when it expects to release its full-year results the week of 13 September. For now, I’ll just wait and see.
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Nadia Yaqub 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.