- Darktrace listed in April and its share price has risen more than 70 per cent
- The company has upgraded its pre-IPO expectations after a better than expected June
For UK investors starved for many years of quality tech companies, the Darktrace (DARK) IPO has been a chance to satiate their cravings. Here is a company which claims “a large total addressable market, a predictable, subscription-based model and a strong balance sheet” - and has the numbers to back that up. Revenues have more than doubled in the last three years at an average gross margin of over 90 per cent – reflective of a software company whose ongoing sales require little expenditure. Losses are narrowing and in 2019, the company generated its first cash from operations.
And investors have feasted: in the three months since the company joined the stock market, its share price has risen 75 per cent.
So, for those who have bought shares at a valuation which has risen from 12 times forecast sales at the time of the IPO to 17.9 times forecast sales at the time of writing, this morning’s trading update is very welcome: Darktrace is increasing its forecasts for the 2022 financial year based on the current excellent run-rates and salesforce improvements which should improve the pace at which it can generate new revenues. Annualised recurring revenue is now expected to increase 32 per cent in 2022, from the $340m (£245m) in the year to June 2021.
But something leaves a bad taste.
It might be the enormous costs consumed by sales and marketing, or the comparatively low spending on product development – research and development expenditure fell to just 6 per cent of revenues in the 2020 financial year.
Perhaps it is the fact that these disappointing figures are reflective of another cutting edge British tech company which is yet to live up to its claims – Blue Prism (PRSM). Or maybe it is the looming shadow of Mike Lynch – the former boss of Autonomy currently facing fraud allegations in the US in relation to his company's takeover by HP – whose investment trust is a founding shareholder in the company.
Or perhaps this is exactly what is wrong with tech investing in the UK. The pain of past disappointments carries too much weight in the thinking behind today’s investment decisions. Companies end up seeking their fortunes on the Nasdaq where their rampant spending and dubious bosses are celebrated rather than feared.
In 2019, research from business management firm Tech Nation claimed that the volume of tech investment in the UK had beaten that in the US or China having secured a third of the early stage capital invested in Europe that year. In March this year, the organisation followed up with another report saying that the early-stage tech investment space remained resilient in the UK, despite the impact of Covid-19 and Brexit.
But herein lies another problem with British tech investment. By the time companies arrive on the stock market, the easy money has been made. Doubt and scepticism can creep into investor thinking. The priority of the business shifts from revenue growth at all costs, to careful management of the profit and loss statement in an attempt to placate institutional investors.
So perhaps the presence of Darktrace isn’t the long-awaited tech overhaul that British investors have been waiting for. They can instead find comfort in the UK’s many investment trusts and financial companies with investments in early stage technology. Scottish Mortgage (SMT) - which has a strong long-term track record - is increasing its exposure to unlisted companies. Draper Esprit (GROW) has stakes in many of the world’s most exciting new businesses - including competitors to Darktrace and Blue Prism. Investors would do well to put their growth investment capital here, rather than watch it gobbled up by the sales team at Darktrace.
