Yesterday, Darktrace (LSE:DARK) shares jumped 12% to close just shy of 650p. This marks another leg higher following the slump seen in late October, following a dump in the price. The question this raises is whether this was just a dip that is now being bought, or if this is a level to re-enter short positions. Here’s our take.
Good news boosts Darktrace shares
The reason for the jump yesterday was off the back of a couple of bits of good news. Firstly, Berenberg released a note saying that “any share price capitulation is a result of fear not fact.” It should be noted that the company has a buy rating on Darktrace shares, so logically would take this view. However, the investment bank does carry a good reputation of the research arm, so investors took this as a reason to buy shares.
The jump can also be seen following news late last week of insiders buying shares. For example, Chairman Gordon Hurst bought 25,000 shares. This is usually seen as a positive, with those in senior positions having skin in the game. Also, if someone like the Chairman is happy to put more money in at current levels, it could suggest that the stock is undervalued.
At 650p, Darktrace shares do still have plenty of room to head higher. Shares closed in late September at 985p, and were at around 950p back in October before the slump. These levels (and the psychological 1,000p mark) would need to be broken on the high side to keep the trend higher.
Why we aren’t convinced
We’re struggling to find enough traction to buy shares at the moment. As we noted back in September, the loss-making Darktrace operates in a tough industry of cyber security. Big established players have economies of scale here, with high investment costs.
If the share price was lower, it would maybe be more attractive as a punt for a potential buyout further down the line by a larger company to acquire the IP. However, at 650p the market cap stands at £4.3bn. Whichever financial metric you look at, we struggle to find one that makes this valuation stack up, even on growth multiples.
Therefore, we’re not convinced that the pop yesterday is the start of something bigger. Peel Hunt (who put out the sell notice that saw the share price drop double-digits in October) is looking for 473p. They feel this valuation is more in line with things. As they commented; “having considered the potential market size, the intensifying competition, and Darktrace’s limited R&D spend, we take a more grounded approach to our valuation, giving a target price of 473p”.
Overall, we feel that there are better places to be allocating investment funds to at the moment.