JPMorgan starts Darktrace at 'underweight', shares slide

JPM 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."

JPM set a 400p price target on the stock.

At 0815 BST, the shares were down 6.5% at 421.93p.