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3 things investors should know about Darktrace shares

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Darktrace (LSE: DARK) shares have taken a hit recently. Over the last year, they’ve fallen around 40%.

Taking a look at the ex-FTSE 100 stock after this pullback? Here are three things to know about the cybersecurity company.

Short seller’s report

One thing that’s crucial to know about Darktrace is that the company was recently the subject of a short selling report (short selling involves betting against a stock).

Earlier this week, New York-based firm Quintessential Capital Management (QCM) published a 70-page research report on the cybersecurity company and its claims were rather concerning.

In its report, QCM said that:

  • It’s sceptical about the validity of Darktrace’s financial statements and believes that sales, margins, and growth rates may be overstated
  • It detected numerous suspicious transactions in the period leading up to Darktrace’s Initial Public Offering (IPO)
  • Increasing competition, high churn rates, and lack of sustainable cash generation point to a “rapid deterioration” in the company’s financials
  • Employment, website traffic, and search volume figures suggest that a sharp slowdown may already be underway

We are of the opinion that Darktrace’s financial statements may not be relied upon.

Quintessential Capital Management

QCM noted in its report that it’s currently shorting the stock.

Short interest has risen

What’s interesting is that QCM isn’t the only firm shorting Darktrace shares right now. Regulatory filings show that QCM currently has a 1.3% short position in Darktrace (ie 1.3% of the free float).

But my research shows that, at present, about 8.2% of the free float is being shorted. This tells me that plenty of other firms are betting against the technology stock.

And what stands out to me is that the number of shares on loan has spiked recently. Currently, around 28m shares are on loan compared to around 17m a month ago.

This indicates that the stock has been getting a lot more attention from the short sellers recently.

Share buyback launched

Now it’s worth pointing out that Darktrace has published several responses to QCM’s report.

First, it published a short statement in which it said that it has “full confidence” in its accounting practices and the integrity of its financial statements and that it has “rigorous controls” in place to ensure it complies with account standards.

Then it published a more detailed statement in which it refuted QCM’s main claims.

On top of this, Darktrace has launched a new £75m share buyback since the short selling report was published. And CEO Poppy Gustafsson has also purchased 48,000 shares in the company. This suggests management believes the stock is undervalued.

Bulls versus bears

So what we have here is a case of bulls versus bears. The company clearly believes it’s in the right and that the stock is cheap right now. However, the short sellers appear to believe that the company is suspect and the stock is set to head lower.

My view? It’s impossible to know who’s right at this stage. However, given the rising interest from short sellers, I won’t be buying Darktrace shares in the near term.

The post 3 things investors should know about Darktrace shares appeared first on The Motley Fool UK.

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Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.