A couple of months ago, I wrote about Darktrace (LSE:DARK) and why I believed the stock was heading lower. Although it hasn’t hit fresh 52-week lows since then, Darktrace shares aren’t higher than when the article was published. Having just revisited it, I don’t believe anything has changed for investors to seriously consider buying the growth stock.
Results gave clarity
One of the major events since February was the release of H1 results in March. On the face of it, there was plenty to shout about. Year-on-year revenue growth of 35.8%, an increase in the customer base of 24.4% and other percentage gains made for good headlines.
Yet when I dug deeper, there were issues. For example, it spoke of “a noticeable late-second-quarter slowdown in new customer additions”. The results mask this slowdown, as growth earlier in the reporting period helps to smooth this over. Yet if new customers (the lifeblood of any business) don’t pick up, it could spell problems for future revenue.
A big swing in profit
There was also a significant fall in bottom-line net profit. It fell by 86% versus the previous six months, to $581k. Various reasons were flagged up for this, including share-based payments, employer tax changes, an inflationary cost base and investment into products.
All of the above reasons are valid for why profit would drop. Yet investors would logically be concerned that these business operating measures have the potential to almost wipe out any profit for the half year. Either this is bad financial management or just extreme bad luck.
Large short positions
Even with nothing changing to change my view to a positive one, others are clearly being more aggressive and actually shorting the stock. Shorting involves borrowing a stock and selling it with the aim to buy it back at a cheaper price.
As of the start of April, 34.4m Darktrace shares were on loan, representing almost 10% of the free float. This is the highest level since the company went public. This doesn’t bode well. Rather it indicates that people think the stock could fall even further.
The power to combat scams
One bright note for the future could be the rapid rise of artificial intelligence (AI) scams. The disruption of generative AI means more sophisticated and plausible sounding scams.
As a result, Darktrace has reacted with upgrades on email packages to counter this. Going forward, it could be a valuable source of revenue.
Nothing to get excited about
The business is in a position whereby the financials are unstable and new customer growth is volatile. I do think the sector it operates in is going to be large in the future, but I just don’t think that investors should be buying Darktrace shares as a way to get exposure to cybersecurity.
The post I avoided Darktrace shares in February. Here’s why nothing’s changed appeared first on The Motley Fool UK.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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