Shares of British/American cybersecurity firm Darktrace (GB:DARK) shares have fallen -16% this week after the circulation of a short report from Quintessential Capital Management spooked traders. A link to the short report can be found here.
The stock reached an all-time low of £1.98 by 1 pm on Tuesday before Darktrace’s management played down concerns to the market in a press release which recovered half of the day’s losses.
In the report, Quintessential analysts discuss how they are “skeptical about the validity of DARK’s financial statements and fear that sales, margins, and growth rates may be overstated and close to a sharp correction.”
The New York based hedge fund believes that it has detected numerous transactions in the period before Darktrace’s £2.50 IPO that involved simulated or anticipated sales to phantom end-users though its network of resellers.
The fund thinks that Darktrace has used “marketing activities” to pay its partners for fake sales and involves shell companies in offshore jurisdictions.
The allegations go even further with the fund highlighting that the shell companies are being managed by individuals with ties to money laundering, organized crime and ultimately fraud.
The investigations suggest that a portion of Darktrace’s past recurring software sales could in fact be one-off hardware sales. The anomalies around deferred revenue may suggest there may be a problem with Darktraces’s revenue recognition which could be giving a misleading picture about the group's cash generation.
Ultimately Quintessential Capital (which currently has a 1.30% short position) thinks there could be a deterioration in financial results with a potential sharp slowdown for the stock.
By mid-afternoon on Tuesday, Darktrace’s management responded to the short-seller in a public press release stating that Quintessential had not even bothered to contact the company for comment or discussion.
DARK’s management responded with the statement saying “We have rigorous controls in place across our business to ensure we comply fully with IFRS accounting standards. We're proud of the business we have built, which today helps to protect over 8,100 customers around the world from cyber disruption."
Needham analysts Alex Henderson and Matt Dezort hit back at Quintessential after reported discussions with management. The analysts explained how the groups accounting practices require all VAR transactions to be backed with hard firm closed orders at the time of recognition.
Needham remains ‘buy’ rated on the stock with a £3.30 target price and thinks any weakness should be regarded as a buying opportunity. The firm also highlighted that DARK is one of the cheapest cybersecurity stocks they cover with strong revenue growth.
Besides the allegations discussed in the report, analysis from the Fintel platform highlighted that Darktrace has experienced high levels of institutional buying activity since listing on the London Stock Exchange.
This has been explained by a bullish Fund Sentiment Score of 70.56, which ranks DARK in the top 16% when screened against 37,084 globally screened securities for institutional interest.
DARK has a total of 51 institutions that collectively own 69.56 million shares. The largest shareholders on the register include: First Trust Invesco International, Oppenheimer Global, Vanguard and Nuveen Securities.
The chart below shows the growing level of fund ownership in the stock since listing.
A summary of short positions disclosed by funds has been provided below from the Fintel Short Sale page for DARK.
This story originally appeared on Fintel.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
