British hedge fund Shadowfall has taken a short position against cybersecurity specialist Darktrace, calling its company “watery”.
The hedge fund is known in the city as the “Dark Destroyer” for its practices of exposing corporate reports and devaluing stocks. While the fund portrays its work as a public service, its own shortseller business model is based on undercutting the prices of the companies it bets on.
In the case of Darktrace, Shadowfall confirmed that The Telegraph took a short position in October, but did not say how much money was put into it.
The fund said: ‘We believe the quality of the Darktrace business is watershed, driven by an aggressive promotional sales focus, which we suspect will stand the test of time.’
IT leaders dealing with Darktrace have told a similar story. Talk With Delta, the computer usage research division, said the company uses “highly pressured” sales techniques that “stun” [potential customers] with algorithms”.
Darktrace went public early last year, with the stock price peaking in September, before falling near launch levels in November-December. Today the price is at 424 pence per share, after a launch of 330 pence per share (up 28.5 percent).
Shadowfall claims that the company, which makes AI-based cybersecurity products, is taking in new customers at significant discounts, while customer retention is also falling. It says the average contract value has dropped 15 percent since 2018 and that more than a quarter of customers have left the company in the past two years.
Darktrace, which revised its sales forecasts this month, has denied the allegations. A spokesperson said that criticism of Shadowfall based on inaccurate financial information was “outdated and already defamatory.”
That didn’t stop Shadowfall from calling Darktrace’s predictions, which again hinge on declining stock prices, a “piece of cake,” noting that its research spending is about a fraction of the total spend compared to rival security firms. As a percentage, it is quite low.
Even if Darktrace’s expenses match those of its competitors, Shadowfall believes the company will meet only half of its stated goals.
Analyzing financial deposits before Darktrace went public, the hedge fund found that after an accounting review in 2019, Darktrace “suddenly” had 181 fewer employees under research and 145 more in sales than before: One change that was not discussed in the listing prospectus.
Darktrace said such improvements were not unusual and that the old numbers were “irrelevant”. A spokesperson said the company “didn’t have to spend as much on R&D as peers” because it has better technology.
The company said it would release its latest financial results in the coming weeks, which “paint a truer picture” than Shadowfall claims.
Darktrace is still haunted by the ghost of Mike Lynch, a shareholder previously accused of massive fraud at his former company, Autonomy. Lynch is now fighting extradition to the US.
Shadowfall says that “dozens” of ex-Autonomy employees, including current CEO Poppy Gustafson, have worked or are still working at Darktrace.