BofA ML starts Darktrace at 'underperform', shares slide

BofA noted that the company primarily operates in the Network Detection & Response cybersecurity market but has been adding some capabilities in the Extended D&R (XDR) space.

"While revenue growth has been strong historically (48% in FY22) driven partly by its attractive interface, successful marketing and a highly effective salesforce, we expect growth to significantly decelerate (BofAe 18% compound annual growth rate of FY23-25e versus 23% cons) as: 1/ we expect much stronger competition in the next 12 months, 2/ weaker macro puts pressure on new wins as customers further consolidate providers, 3/ upsell potential remains unproven with limited success to date," it said.

The bank explained that in a weak macro environment, customers are often likely to buy additional solutions from existing providers rather than from new ones.

"This puts significant pressure on Darktrace as it relies primarily on new wins," it said.

ML also noted that the company's circa 105% net retention rate is significantly below peers, "and we believe this is due partly to limited upsell potential due to underinvestment".

The bank said it's around 3%/6% below consensus on revenue for FY24/25e, and around 4% and 14% below consensus on adjusted EBITDA for FY24/25e as it expects Darktrace to "materially step up on R&D to remain competitive as peers continue to invest more to constantly innovate and tackle evolving security threats".

At 1350 BST, the shares were down 12.2% at 256.28p.