3 things investors should know about Darktrace shares

Darktrace (LSE: DARK) shares have taken a hit recently. Over the past year, they have dropped about 40%.

Looking at the exFTSE 100 stocks after this pullback? Here are three things to know about cybersecurity companies.

Short seller report

One important thing to know about Darktrace is that the company has recently been the subject of a short selling report (short selling involves betting against the stock).

Earlier this week, New York-based firm Quintessential Capital Management (QCM) published a 70-page research report on cybersecurity companies and the statement is somewhat concerning.

In its report, QCM said that:

• Doubts about the validity of Darktrace’s financial statements and believe that sales, profits, and growth rates may be exaggerated.
• It detected many suspicious transactions in the period before Darktrace’s Initial Public Offering (IPO).
• Increasing competition, high churn rates, and a lack of sustainable cash flow make “break down quickly” in corporate finance
• Employment, website traffic, and search volume numbers indicate that a sharp slowdown may have already taken place

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

Major Capital Management

QCM noted in the report that they are currently short of stock.

Short interest has risen

Interestingly, QCM isn’t the only Darktrace stock short. Regulatory filings show that QCM currently has a 1.3% short position in Darktrace (ie 1.3% of free float).

But my research shows that, currently, about 8.2% of the free float is shorted. This tells us that many other companies are against tech stocks.

And what I mean is the number of shares that have been lent recently. Currently, about 28 million shares are on loan compared to about 17 million a month ago.

This indicates that the stock has received more attention from short sellers.

Share buyback opened

It should now be noted that Darktrace has published some responses to the QCM report.

First, it released a short statement saying that it has “complete confidence“in accounting practices and the integrity of financial statements and ownership”strict control” in place to ensure compliance with account standards.

It then issued a more detailed statement refuting QCM’s main claims.

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

Bull versus bear

So what we have here is a case of bulls versus bears. The company is confident that it is on the right side and the stock is currently cheap. However, short sellers seem to believe that the company is suspect and that the stock will fall.

My view? It is impossible to know who is right at this stage. However, due to increased interest from short sellers, I will not be buying Darktrace stock anytime soon.