Darktrace (LON: DARK) shares are down 4% this morning. That DARK shares have fallen could be something of a surprise, given that the reason is their results announcement which shows profits up 3,946%. One response to this could be just to shout that it’s not fair. But there are two reasons why this isn’t quite so. One is a fairly standard stock market point, that it’s perceptions and beliefs that determine prices. The other is specific to Darktrace, and it’s that perceptions and beliefs are what determine prices.
The results announcement: “Strong year-over-year revenue growth across all geographic markets and customer sizes. Adjusted EBITDA margin improvement of 3.5 percentage points over prior year, reflects scale efficiencies, ongoing discretionary cost management and some benefit from certain late-year, largely non-cash, factors including foreign exchange movements. Adjusted EBIT margin improvement of 3.1 percentage points over prior year supports continued progress towards long-term steady state model with Adjusted EBIT margins in the mid-20%s. Free cash flow (FCF) of $93.8 million, reflecting 67.4% of Adjusted EBITDA, reflects continued strong cash generation, though somewhat reduced from prior year by net settlement of vesting equity grants for Executive Directors in the period.”
Those are good results, no doubt about it. And yet we get a fall in the share price as a result? The standard answer is that perceptions and beliefs thing. The market was expecting something even better, had built into the DARK share price something better. So, when the results were not quite as good as hoped the fall. Or, as we can also put it, buy the rumour and sell the fact.
Darktrace share price from Google Finance
There is the more specific issue here though. For Darktrace, as with other cybersecurity companies, there has been a slowing down of new business. It just seems to be getting more difficult to get the cash out of managements.
The other thing is specific to Darktrace: “The other issue is that problem over Autonomy and Mike Lynch. The slight worry on the market being that Autonomy was - to be kind about it - accused of being aggressive in revenue recognition. Mike Lynch has now been extradited to the US to stand trial on charges stemming from the HP takeover. The worry has long been, well, given that Lynch was a founder at Darktrace, are they also - umm - aggressive on revenue recognition. All the specific examples used the company says were sorted out before flotation. And maybe they all were. But reputations don't necessarily depend upon facts. So, perhaps that reputation - or worry - is lifting. Now that Lynch is extradited and there's little prospect of a trial for months and months at least, there might well not be any news to worry people on the point.”
Whether that’s fair or not is not the issue. That the attitude - the worry perhaps, the wonder - exists at least in corners of the market is true. And that’s simply a weight upon the Darktrace share price.
