Today’s events at Darktrace should trigger ‘meaningful re-rating’

A double dose of good news has propelled this AI-focused FTSE 250 share to its highest in almost eight months. Those in the know think it should go much higher.

The valuation gap between Darktrace (LSE:DARK) and US cybersecurity peers narrowed today after an accounting review gave the AI-focused FTSE 250 stock a clean bill of health.

The re-rating following the conclusion of auditor EY’s independent review of Darktrace’s financial statements left shares trading at their highest level since November at 374p.

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As well as the removal of uncertainty, investors welcomed figures showing 31% growth in revenues as customer numbers rose 18.3% in the June financial year. A forecast adjusted margin of not less than 22% is also much higher than previous 19% guidance.

Analysts at Goodbody said a structural tailwind driven by an evolving threat environment positioned Darktrace strongly for growth.

They added: “Darktrace trades at a steep discount relative to US peers. It has remained resilient in terms of top line trends and marginally beaten expectations in 2023 in a challenging market for almost all cybersecurity businesses.”

US bank Jefferies, which has an unchanged price target of 500p, increased its earnings forecasts for the new financial year and for 2025 by 3% and 12% respectively.

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It pointed out that Darktrace traded on 12.5 times forward earnings: “We would argue that Darktrace has been overlooked for a while and the EY report and reassurance on trading and guidance should trigger a meaningful re-rating.”

Cambridge-based Darktrace employs over 2,200 people and protects approximately 8,800 customers globally from advanced cyber threats.

Rather than study attacks, Darktrace's technology continuously learns and updates its knowledge of customers and applies that understanding to optimise cyber security.

Its chief executive Poppy Gustafsson (pictured above) said today that the release of ChatGPT late last year had created a significant shift impacting consumers and enterprises.

She said: “The risks of intellectual property loss, data protection breaches and evergreen novel attacks at scale are now much higher. AI is increasingly fighting against AI so building a bigger database of known attack data is not enough.”

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As one of the fastest-growing companies on the London market, she said Darktrace was underpinned by its subscription-based business model and strength of balance sheet.

She added that the company’s recent innovation would pay off in a re-acceleration of sales in the second half of this financial year.

Darktrace’s flotation in April 2021 saw shares initially priced at 250p for a valuation of £1.7 billion, before they hit a peak of just above 1,000p in September of that year.

They slumped to 210p in January this year after the company’s financial processes were criticised by New York-based Quintessential Capital Management.

In its review, EY reported a number of areas already known to Darktrace where systems, processes or controls could be improved but these were not material to the company's previous financial statements.