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Darktrace
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=== Risks to JP Morgan's view === * Competition risks may take time to play out: While JP Morgan believes that the market for AI-led threat detection and response solutions remains highly competitive, Darktrace’s brand awareness (supported by high marketing spend) may continue to support new customer acquisition without incurring higher costs. XDR vendor solutions may take time to mature; in addition, enterprises may likely be wary of getting locked-in to any particular XDR vendor’s ecosystem, potentially diluting the competitive threat from XDR vendors. Mid-term competitive threat from public cloud vendors may not materialize within a reasonable timeframe. * Broader platform adoption across larger enterprise customers: Darktrace’s customer base is skewed towards SMB/mid-market enterprises (~85% of customers generate sub-$100k ARR); however, growing adoption in larger enterprises and the subsequent shift in customer mix, may drive higher average contract ARR per customer and lower gross ARR churn – factors that may help the company scale up profitability over the coming years. * A '''sustained decoupling between ARR growth and new customer acquisition''' / investment in new sales headcount might prompt us to revisit JP Morgan's UW thesis, as this would put the company on path towards sustainable profitable growth. * Regulatory/compliance laws (or cyber insurance requirements) mandating the use of AI-led threat detection and response solutions could boost demand for Darktrace’s offering, potentially lowering new customer acquisition costs. * M&A: Darktrace may appear a candidate for acquisition by larger cybersecurity vendors looking to acquire AI-driven detection and response solutions. This expectation may offer downside support to Darktrace’s share price, in JP Morgan's view. * Near-term support from healthy ‘beat and raise’ results: JP Morgan's concerns on profitable growth may not play out over the next few quarters, which may result in the company delivering consistent strong performance in the near-term.
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