Will Darktrace grow its customer base as Russia sparks cyber warfare fears?

AI cyber security company Darktrace finds itself on investors’ radars on threats that the Ukraine-Russia conflict may culminate in cyber warfare. Improving cyber resilience is set to become a new normal for companies and countries that plays into Darktrace's core strength.

Even if the wider global community isn’t targeted by Russia, artificial intelligence and cyber security firm Darktrace [DARK.L] believes that the conflict has reinforced the need for businesses and governments to bolster their cybersecurity.

Justin Fier, director of cyber intelligence and analytics at Darktrace said that cyber warfare will become the “standard modus operandi” as cyber attacks are “far more powerful than bullets,” reported Tech Monitor.

The Darktrace share price has been gaining some lost ground in recent weeks. It’s up 35.45% since the company’s IPO last April, the share price is way below its all-time high of 1,003p, which it peaked at back in September.

Darktrace remains a loss-making company despite its future prospects. For now, investors should be cautious, warns Hargreaves Lansdown lead equity analyst Sophie Lund-Yates. “Just because something sounds good doesn’t mean you should buy it at any price… risk [for Darktrace] is elevated as there’s no buffer for if things hit a rough patch,” Lund-Yates told the Hargreaves Lansdown podcast.

The stock hit a year-to-date low of 306.80p on 18 February, but since the end of the month Darktrace has been trading at or around its highest level since late November and early December. It is up 14.2% since the start of 2022 to 447p.

Lund-Yates further warns against the reputational risk that he company runs. Darktrace’s founder, Mike Lynch, has faced two unfavourable rulings in a fraud trial and an extradition hearing.”

Geopolitical benefits

Darktrace reported earnings for the first six months ended December 2021 3 March. Revenue for the six months to the end of December 2021 was up 52.3% year-over-year to $192.6m. More importantly, its customer base grew by 39.6% as geopolitical tensions, particularly between the US and China, saw companies rush to protect their operations. This helped the company to report a net profit of $5.9m, having reported a $48.4m net loss a year earlier.

CEO Poppy Gustafsson (pictured above) said in the earnings report: “The current geopolitical situation has heightened the urgency for businesses and governments to improve cyber resilience.

“We are laser-focused on our mission to protect organisations around the world from cyber attacks and on our ambition to create a continuous [artificial intelligence] loop for our customers.”

Revenue growth forecast for the full year has been raised to between 44.5% and 46.5%, up from the previous guidance of 42% to 44%. This is expected to be driven by strong growth in annual recurring revenue, which has also been revised upwards from between 37% and 38.5% to between 38.5% and 40%.

Darktrace warned on the earnings call that costs, which have been suppressed by the pandemic over the past two years, are likely to rise in the medium term, but its strong outlook should enable it to maintain healthy margins. And this should be underpinned by continual customer growth.

The company currently boasts more than 6,500 customers in over 110 countries. It has been strengthening its ties with governments and on 1 March announced a new division, Darktrace Federal, designed to serve the US Department of Defense and the country’s national critical infrastructure.

While Russia has been accused of cyber-attacks on Ukraine, including hacking its satellite communications, cyber warfare is yet to spill over into the wider global community. But the threat is very real and Darktrace’s full-year 2022 earnings should reflect a significant uptick in users as well as reduced customer churn.