Broker tips: Vodafone, Moneysupermarket, Darktrace

It noted that Vodafone's share price was up 12% year-to-date, making it one of the better performing stocks in the Stoxx 600 telecoms index, and said it's always easiest to justify a 'buy' recommendation with forecasts above consensus.

"We are not in that position. Looking ahead to the 2022/23 guidance that will be issued alongside the Q4 results, we have concerns that consensus may not be taking sufficient account of cost inflation, Turkish lira weakness, and the extent to which 2021/22 EBITDAaL has benefited from an Italian one-off legal settlement.

"We note that only five of Vodafone's operations have inflation-linked pricing mechanisms in their consumer customer contracts (the UK, Ireland, Portugal, Hungary and Albania)."

Berenberg pointed out that ever since Vodafone overtly stated its ambition to pursue in-market European consolidation at the H1 results in November, antitrust approval uncertainty had been the main topic of investor debate.

"We believe that Vodafone's public statement of its ambitions has raised expectations among investors, which may also weaken its negotiating position and invite opportunism from potential partners."

Barclays downgraded its stance on Moneysupermarket on Tuesday to 'equalweight' from 'overweight' and slashed the price target to 220.0p from 260.0p as it argued there was more upside elsewhere.

The bank said it still sees reasons to be positive on the shares, with the firm's CEO making operational improvements, its travel and money unit looking set tp trade well this year and the fact that the stock still looks cheap, with reported private equity interest protecting the downside.

"However, in the last six months the stock has outperformed the European Internet sector, given its 'value' characteristics," Barclays said. As a result, it now sees more upside on several other ‘overweight’ stocks.

"More specifically, we want to be clear: this is not a call on Q1," it said. "More that, with Energy likely to be very weak for some time and Money and Travel widely expected to rebound, we think the key this year is whether Insurance can get back to growth whilst holding gross margin gains.

"If yes, we see a catalyst to argue for 'value'; if not, a debate on a 'value trap'. We believe market share can improve in Insurance, but we lack confidence it won't be offset by weak end-markets. We don't have enough conviction to 'pound the table' as an OW, hence we move to EW."

Cybersecurity firm Darktrace was under the cosh on Tuesday as JPMorgan Cazenove initiated coverage of the shares at 'underweight', saying the path to sustainable profitable growth was unclear.

JPM, which set to the stock a 400.0p target price, said that today, Darktrace leads the Network Detection and Response market and has seen good early success with its email product.

However, against the backdrop of high competition and potential commoditisation of security solutions addressing similar use-cases and relatively low platform lock-in and customer stickiness, it expects customer acquisition and retention to become more challenging.

"High competition and low customer stickiness will likely translate to higher customer acquisition costs and prompt Darktrace to increase investments in existing and new product development - both of which will limit margin leverage going forward, in our view," the bank said.

It expects the sum of revenue growth and free cash flow margin to dip and remain below 40% over the next couple of years.

"Eventually, this is likely to reflect in Darktrace’s valuation compared to other cybersecurity peers that consistently beat this 40% benchmark," it said. "With ARR growth tied to new customer acquisition, we believe that higher customer acquisition costs and lower customer retention are likely to challenge the company’s ability to deliver profitable growth."