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It’s been a wild ride for dark stroke (LSE:DARK) shares over the past year. Even though the stock is down 41% over this period, it has seen wild moves both up and down. However, after all the chatter about the acquisition and the latest financial results, I have a hard time seeing Darktrace’s stock price going anywhere but lower. This is why.
Downward pressure in the last year
The business has struggled to give potential investors like me plenty of reason to rejoice. One reason for this is that even respected institutional investors stay away.
Thomas Bravo (a private equity firm) was considering buying the business last fall, but backed out. This decision coincided with the release of full-year results, and while we don’t know the official reason the company pulled out, I believe it was tied to the details of the results.
Whatever the reason, after conducting due diligence, Thomas Bravo decided not to proceed with the deal. Darktrace’s share price dropped 28% when this was announced.
As recently as last month, other companies were taking a more aggressive approach. A large hedge fund in the US is shorting stocks, which means it will make a profit if the stock falls. He has published a 69-page document that discusses the perceived flaws in Darktrace.
A hard road ahead
The January business update revised the company’s full-year guidance downward. quoted “macroeconomic uncertainty” and said that “By the end of the second quarter, it became clear that the (negative) impact on new customer growth had been larger than expected.”
As an extension of this, my concern is that the business is primarily aimed at small and medium-sized enterprises (SMBs). With the UK economy not in a good place, these are specifically the types of businesses that will cut all but essential spending. So I think Darktrace might have a hard time growing their customer base in this area.
From the current price of 245 pence, the next level that I am watching to see if it drops again is the 52-week low of 198 pence. This would put the market capitalization at around £1.4bn. Given the company’s net assets and projected revenue growth, I would be hard-pressed to see the market capitalization go below £1bn. So I think the lowest it could go before being undervalued would be a share price of 142 pence.
Risks in my sight
Of course, it’s not all doom and gloom at Darktrace. The business is still forecast to grow revenue by a double-digit percentage this year. Adjusted EBITDA margin is also expected to increase from a range of 15-18% to 16-18.5%.
If Darktrace can carry this momentum forward and get some good reports from bank and broker analysts, it could shake off negative news coverage. All of this would support the stock price going up.
Ultimately though, I think the share price could fall below 200p in the coming months, so I won’t be investing now.
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