Analyst downgrades heap pressure on Darktrace share price

After its much-awaited IPO last year, the Darktrace share price originally soared to over 1,000p. But a slew of analyst downgrades has led the stock to shed more than two-thirds of its value, despite the fact that the sector it operates in looks robust, as do its revenue figures.

Darktrace [DARK.L] has faced a rocky start to life as a listed company. In its first few months following its April 2021 IPO, the Darktrace share price soared, thanks to its exciting prospects and excellent growth. Indeed, it hit a high of 1,003p on 24 September 2021.

However, since this moment to the market close on 8 July, the Darktrace share price has sunk 68.6%. This fall has mainly been due to analyst downgrades, and a general tech correction has not helped the stock. The lock-up period for pre-IPO shareholders also ended during this time, meaning that they were allowed to sell.

Darktrace is still performing excellently as a business, however. In an April trading update, it has upped expectations for 2022 revenue growth, while its customer base is also expanding at rapid levels. At the same time, the cybersecurity market is expected to see strong growth over the next few years.

Analysts downgrade Darktrace

The most damning analyst downgrade came at the end of October 2021, when Peel Hunt, an investment bank based in London, placed a ‘sell’ rating on the stock and a price target implying a downside of 50%. It also stated its view that Darktrace products are a “gimmick” and pointed to intensifying competition. Since this moment, the company has dipped from a market capitalisation of £6bn to £2.2bn.

There have also been some more recent analyst downgrades. At the end of May, JP Morgan placed an ‘underweight’ rating on the cybersecurity firm, highlighting increased competition from the likes of Amazon [AMZN] and Alphabet [GOOGL]. The investment bank also pointed to higher customer acquisition and retention costs, which may prevent Darktrace from producing healthy and sustained profits. This could be a major negative moving forward.

At the end of June, Berenberg also decreased its price target for the group from 1,000p to 600p. Previously, Berenberg has stated that the plunge in the Darktrace share price has been driven by “fear not fact”. Therefore, the recent price target downgrade shows that the group has become more bearish. Even so, a price target of 600p still implies an upside of 90.5% on the 8 July closing price.

What other factors are working against Darktrace?

Despite the declining share price, Darktrace has been able to perform very well over the past few months. For example, in the recent Q3 trading update, revenues climbed 50% year-over-year to almost $110m, while the company also managed to add 359 net new customers. Most importantly, forward guidance was also raised and Darktrace now expects revenue growth for the whole year to be up 46% from last year.

The outlook for the cybersecurity industry is also extremely robust. In fact, in the aftermath of the Russian invasion of Ukraine, Poppy Gustafsson, the CEO of Darktrace (pictured), stated that “the current geopolitical situation has heightened the urgency for businesses and governments to improve cyber security”. This should benefit Darktrace.

The long-term future of cybersecurity also seems extremely robust. According to Fortune Business Insights, the cybersecurity market size is projected to reach $376bn in 2029, at a compound annual growth rate of 13.4%. This should be driven by the rising number of e-commerce platforms.

The company is also bolstering its AI capabilities, with a €47.5m acquisition of Cybersprint. According to Darktrace, this deal has been “enriching” for the group, and it will “accelerate the company’s market entry into new areas like proactive AI cybersecurity”. This may help Darktrace beat competitors in the cybersecurity market.

What’s next for the Darktrace share price?

Due to the aforementioned analyst downgrades, analysts are not overly confident about the future for Darktrace.

According to analysts polled by MarketBeat, the firm currently has one ‘buy’ rating, one ‘hold’ rating and two ‘sell’ ratings. This highest price target is 600p, while the lowest sits at 320p. The average price target is 466p, implying an upside of 48% on the 8 July closing price.