Darktrace was under a cloud today as US bank JP Morgan started coverage with a gloomy assessment of its prospects.
One of the UK tech stars, Darktrace is a provider of AI-led cybersecurity and has been doing well with its email product, says the broker, but high competition and the possible commoditisation of security solutions plus relatively low platform lock-in and customer stickiness point to headwinds ahead.
“In addition, there is a risk from public cloud vendors such as Microsoft, Google and Amazon making a big push in the areas of cloud traffic and email security.”
“That means customer acquisition is key, but high costs of both acquiring and retaining clients means challenges lie ahead and Darktrace will have to increase investments in existing and new product development.
“We expect the sum of revenue growth and FCF (free cash flow) margin - the ‘Rule of 40’ - to dip and remain below 40% over the next couple of years."
Eventually, this is likely to reflect in Darktrace’s valuation, believes the broker, hence an 'underweight' rating and a price target of 400p two years out.
Shares dropped 6% to 424p.