“Gap between promise and reality” at AI security firm Darktrace priced at 23% by the market so far

By Elles Houweling

British-American cybersecurity company Darktrace saw its share price plunge on Monday after a “sell” note was issued by London brokerage Peel Hunt raising concerns about the firm’s products and methods.

“Speaking with its customers, it appears Darktrace’s strong marketing engine has been a cause of some controversy, as many felt there was a gap between the promise and reality,” the analysts said. The note assessed that the company’s aggressive marketing may be the primary reason for its strong sales, a suggestion which has been made before.

“While we believe strong growth rates will continue, we also see a disconnect between the valuation and the ultimate revenue opportunity,” Peel Hunt added.

The artificial intelligence-focused (AI) cybersecurity firm’s share prices subsequently suffered a 23% plunge, dropping to 700.6p upon opening on Tuesday. This was still well above the 473p target price that Peel Hunt rated it at, leaving the company valued at a total of approximately £5bn.

A Darktrace spokesperson responded to the analyst’s note, pointing out that Hunt had underestimated the company’s breadth by focusing only on its network security department.

“Darktrace’s self-learning AI protects organizations from cyberattacks across the range of digital environments, of which the network is just one of many,” the email read.

“Darktrace technology can therefore not only be described as a network. The customer satisfaction of our 5,900 customers remains industry-leading,” the response added.

The share price plunge overshadowed the news that the company will be promoted to the FTSE 100, where it will replace supermarket group Morrisons.

Founded in 2013, the Cambridge and San Francisco-headquartered company provides AI software intended to autonomously detect and respond to cyber threats against firms.

The company’s original AI technology, Enterprise Immune System, was supplemented by its Antigena autonomous response technology, which allowed the system to react to in-progress cyberattacks.

The technology uses unsupervised AI to establish the parameters of its customers’ system and creates a map of its normal behaviour. This allows the software to spot anomalies and detect threats when they arise.

According to GlobalData’s thematic report, the company launched a new business unit in 2017, Darktrace Industrial, to fight industrial and supervisory control and data acquisition (SCADA) network threats.

Towards the end of 2019, Darktrace introduced Cyber AI Analyst, a new technology that emulates human thought processes to continuously investigate cyber threats at machine speeds.

Yet, since the company’s inception, the field of cybersecurity has changed.

“When Darktrace started out, it was very innovative, but I think the competition has closed the gap,” Joel Stradling, research director for European security at IDC, told Tech Monitor, Verdict’s sister publication.

“Its system is sophisticated and it has a compelling message, but it’s becoming increasingly difficult for the company to differentiate based on that,” he added. This coincides with Peel Hunt’s recent analysis.

The company’s reputation has also suffered from its ties to alleged multibillion-dollar fraudster Mike Lynch, who was one of the company’s earliest investors with his VC fund Invoke Capital. Lynch and his wife owned nearly a fifth of Darktrace when it went public.

The headline-making former CEO of Autonomy faces fraud charges in the US regarding the $11bn sale of Autonomy to Hewlett-Packard in 2011. He allegedly inflated the value of his company to $11.7bn, a year after which HP wrote off $8.8bn of Autonomy’s value, blaming Lynch and former Autonomy CFO Shushovan Hussain.

Lynch is currently awaiting the outcome of the US extradition request after a judge delayed the decision last month. Hussain was jailed in the USA over the Autonomy affair in 2019 and lost an appeal against his sentence this year: he is also a Darktrace shareholder, and was employed at Darktrace until 2016. Various other former Autonomy personnel are involved with Darktrace, including current Darktrace CEO Poppy Gustafsson who previously held roles at both Autonomy and Invoke Capital.

Nevertheless, Darktrace has still been performing well since its London Stock Exchange debut in April. As the bell rang, the company immediately saw its share price surge 44%, valuing the company at £2.3bn at the end of its first day’s trading and placing it in the upper reaches of the FTSE 250 index. The firm had originally hoped to list at £3.5bn, but cut its target massively before the IPO.

According to GlobalData’s thematic scorecard, Darktrace ranks fifth among enterprise security companies.