Darktrace announces stock buyback as short-sellers circle
Plans to buy back up to 35 million shares as finance firms QCM and Marshall Wace bet against it
UK cybersecurity company Darktrace has announced it plans to buy back up to 35 million shares worth £75 million.
The announcement came after its shares fell by more than 10% on Tuesday, as short sellers questioned the company's financial foundations.
On the news of the planned buyback, which would be completed by the end of October, Darktrace's shares rose slightly, but it are still down 16% this week so far.
Last month, shares in the Cambridge-based AI cyber security company plunged after it announced a reduction in forecast revenues for this year. The company's value declined 38% during 2022, in line with other major cyber security companies such as CrowdStrike.
Darktrace sells its AI-enhanced security solutions to large enterprises. It is known as a market leader in its field, but its solutions come at a premium price.
This week, investment firm Quintessential Capital Management (QCM) and hedge fund Marshall Wace questioned Darktrace's viability
"After a careful analysis, we are deeply sceptical about the validity of Darktrace's financial statements and fear that sales, margins and growth rates may be overstated and close to a sharp correction," New York-based QCM said in a report [pdf].
"We would like to give our strongest possible warning to investors and believe that Darktrace's equity [is] overvalued and liable to a major correction, or worse."
QCM said the company's aggressive sales approach means that clients would be less likely to renew after three years, reducing Darktrace's appeal as a long-term investment.
It harked back to the company's origins in Autonomy, whose former CEO Mike Lynch is fighting extradition to the US on fraud charges, and who until recently was a major stakeholder in Darktrace.
"Given its close ties to Autonomy, it would be reasonable to wonder whether certain individuals within DT's management team may have been tempted to replicate its problematic sales practices, perhaps with additional sophistication," the report said.
QCM has now taken a 0.86% short position on Darktrace, in effect betting its stock will fall. London-based Marshal Wace has taken a 0.9% short position.
Darktrace pushed back on QCM's allegations, saying in a statement on Tuesday: "As a UK listed business, our management team and board take our fiduciary responsibilities very seriously and have full confidence in our accounting practices and the integrity of our independently audited financial statements.
"We have rigorous controls in place across our business to ensure we comply fully with IFRS accounting standards. We're proud of the business we have built, which today helps to protect over 8,100 customers around the world from cyber disruption."