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Darktrace
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== Summary == Darktrace is a provider of AI-led cybersecurity offerings. Today, Darktrace leads the Network Detection and Response market and has seen good early success with its email product; however, against the backdrop of '''1)''' high competition and potential commoditization of security offerings addressing similar use-cases and '''2)''' relatively low platform lock-in and customer stickiness, JP Morgan expects customer acquisition and retention to become more challenging for Darktrace going forward. With annual recurring revenue (ARR) growth tied to new customer acquisition, JP Morgan believes that higher customer acquisition and retention costs are likely to challenge the company’s ability to deliver profitable growth. Accordingly, JP Morgan's Dec-23 price target is 400p. * '''Darktrace’s addressable markets are characterized by low barriers to entry and high competition.''' With relatively low barriers to entry and increased competition, JP Morgan sees a risk of commoditization of offerings targeting the use-cases addressed by Darktrace. A growing list of vendors that seek to combine different point security solution offerings into an eXtended Detection and Response (XDR) fabric will only increase the competitive intensity for Darktrace, whose offerings are a complement (rather than a replacement) for other point security tools. In addition, there is risk from public cloud vendors such as Microsoft, Google and Amazon making a big push in the areas of cloud traffic and email security. * '''Shifting the focus to profitability.''' High competition and low customer stickiness will likely translate to higher customer acquisition costs and prompt Darktrace to increase investments in existing and new product development – both of which will limit margin leverage going forward, in JP Morgan's view. JP Morgan expects the sum of revenue growth and FCF margin (‘Rule of 40’) to dip and remain below 40% over the next couple of years. Eventually, this is likely to reflect in Darktrace’s valuation compared to other cybersecurity peers that consistently beat this 40% benchmark. With ARR growth tied to new customer acquisition, JP Morgan believes that higher customer acquisition costs and lower customer retention are likely to challenge the company’s ability to deliver profitable growth. JP Morgan's adj. EBITDA estimates are 22%/4% below consensus for FY23/24, respectively. * '''Initiating.''' JP Morgan initiates coverage on Darktrace with a Dec-23 price target of 400p. JP Morgan's price target is based on 5.5x ’23E EV/sales (calendarized), ~35% discount to the peer group median (comprising a targeted list of product-led threat detection and response and cyber exposure management/user behaviour analytics vendors).
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