Could slower near-term growth weigh on the Darktrace share price?

Darktrace admitted a slowdown in growth rates in its recent Q3 update, with annual recurring revenue set to come in at the lower end of expectations. Nevertheless, the cybersecurity stock has regained some lost ground over the last couple of weeks, as well as finding no evidence that LockBit had infiltrated its systems, despite claims from the ransomware group.

The Darktrace [DARK.L] share price gained a modest 2.3% last week, to close at 258.10p. This consolidated the previous week’s 4.5% jump, which followed the release of its third quarter (Q3) trading update, and took the shares above the 250p IPO price.

In its quarterly update, released on 13 April, the Cambridge-headquartered cybersecurity stock said it had seen a slowdown in new customer numbers, with annual recurring revenue (ARR) now expected to come in at the lower end of its forecasts. With a period of slower growth potentially on the cards in the near term, could this put pressure on Darktrace’s share price?

Meanwhile, the AI-focused company has reassured clients and investors over a claim of a ransomware security breach made by notorious hackers LockBit, after confirming that an internal investigation had found no evidence of foul play.

Darktrace share price continues recovery from all-time low

Darktrace shares rose 4.58% on 13 April, after the company issued a largely positive Q3 trading update, while also admitting that the ongoing difficult macroeconomic conditions are having an adverse impact.

Back on 31 January, the DARK share price dropped to a record low price of 198.00p, as the company faced accusations over its valuation from the New York-based hedge fund Quintessential Capital Management, which said it was “deeply sceptical about the validity of Darktrace’s financial statements”. Darktrace has since appointed EY to carry out an independent review of its finances.

The shares have climbed 30.35% from that all-time low, but remain 53.98% down from the August 2022 52-week high of 560.80p, and a mile away from the October 2021 all-time peak, which was well above the 900.00p level.

Bullish trading update in face of macro headwinds

Darktrace issued some encouraging numbers in its Q3 report, but expressed caution around the impact of the gloomy macro environment on its full-year results. Q3 revenue jumped 28.1% year-on-year to $139.2m, while ARR is up by an impressive 33.7% from a year ago, thanks to the company’s “multi-year contract structure”.

For the full year, Darktrace anticipates an ARR increase of 29%, at the lower end of its previous guidance, and revenue growth of 31%. Its earnings before interest, taxes, depreciation and amortisation (EBITDA) margin is expected to improve to 19%, up from a previous estimate of 16-18.5%. Chief financial officer Cathy Graham said: “Despite macro-driven, and most likely temporary, slower growth expectations, it is a testament to our resilient business model that we can drive an increase in our profitability expectations.”

However, Darktrace warned that it expects new customer growth and sales to slow, due to “continued uncertainty” in the global economy. This was reflected in Q3, as the FTSE 250 constituent reported a 6.3% drop in ARR growth, while adding fewer new customers, relative to the same period last year. Graham said the company is predicting a “slower than normal sales environment for the remainder of the financial year”.

On a positive note, Darktrace was able to reassure the markets and its clients after it found no evidence of a breach in its network, despite the LockBit ransomware group’s claim it had stolen data from the company's systems. After a thorough internal investigation, chief information security officer Mike Beck confirmed “there has been no compromise of our systems”, adding that “our service to our customers remains uninterrupted and is operating as normal”. LockBit seemingly confused Darktrace with the threat intelligence company DarkTracer.

What’s next for the DARK share price?

Analysts polled by the Financial Times remain largely bullish on Darktrace’s share price potential. The 11 analysts offering 12-month price targets for Darktrace have a median target of 430.34p, with a high estimate of 650.74p, and a low estimate of 250.16p. The median estimate represents an attractive potential upside of 66.74% versus last Friday’s 258.10p close.

Two analysts currently rate the stock a ‘buy’ with the FT, nine an ‘outperform’, two a ‘hold’, and one an ‘underperform’.

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