Was Darktrace’s surge a case of sentiment-driven investing on steroids?

The AI firm’s journey so far shows nobody has a real idea of what cyber-fighting tech is worth

Last modified on Wed 3 Nov 2021 15.56 EDT

A loss-making business that uses artificial intelligence to spot cyber abnormalities was never likely to be easy to value but, even with that proviso, Darktrace’s first six months as a public company have been extraordinary.

The story so far is a listing at 250p in May to a rapturous reception. By September, the shares were touching £10, equating to a valuation of £7bn, enough for entry to the FTSE 100 index to replace private equity-bound Morrisons. The decline started almost simultaneously. The shares lost a fifth one day last week as a broker turned bearish, and have mostly kept falling. Wednesday’s 5% tumble took the price to 600p.

That still represents a splendid gain for buyers at IPO. On the other hand, they will be cursing themselves for not banking a few quid at the top. The next round of potential drama relates to the end of the six-month lock-up period for pre-IPO investors. A couple have already trimmed their holdings, and eyes are now trained on Mike Lynch, the ex-Autonomy chief who owns 16% with his wife.

Darktrace has delivered better-than-expected sales numbers in its brief time as a public company, so has not upset its growth narrative one jot. The shares will settle eventually but the only conclusion one can draw so far is that this is a case of sentiment-driven investing on steroids. The cyber-fighting tech is clearly interesting, but nobody has a real idea of what it’s worth.

Sky Vegas mishap revives self-regulation concerns

One factor behind a 5% decline in punters’ stakes in the UK and Ireland, explained the gambling giant Flutter earlier this week, was “further enhancements to our safer gambling approach”. In other words, controls to tackle the social blight of problem gambling can now be felt in the revenue line. Very good but the enhancements clearly have not been enhanced enough.

A Flutter operation, Sky Vegas, has committed a serious no-no by offering free “spins” – free bets on online casino games – to recovering gambling addicts who had actively registered not to receive promotional material. It’s a little like a pub landlord sending whisky miniatures to alcoholics who had voluntarily barred themselves from the premises.

An apologetic Sky Vegas could not immediately explain what went wrong but knows it has messed up in basic fashion. Self-exclusion lists are the cornerstone of the industry’s attempt to present a cleaner image. If a unit of the UK’s biggest gambling company cannot be relied upon to implement IT controls competently, boasts about the supposed advantages of self-regulation ring hollow.

As it happens, the government is preparing a white paper on gambling reform in which a ban on “free” bets is one of many ideas under consideration. Go for it. The world would not be poorer if bookies were told to send us fewer invitations to lose our money on soulless electronic roulette wheels.

Financial clouds could start to loom over Next

Next has upgraded its profit guidance four times this year, which the chief executive, Simon Wolfson, had to concede, at the time of the last revision in September, was slightly embarrassing. Boardroom caution is preferable to blind optimism, but best not to overdo things.

Wednesday’s trading update marked the end of the run of upgrades, however. Next is sticking to its last prediction of £800m, despite sales in the past five weeks being stronger than expected. In practice, one suspects the company will beat the round number by a few million quid (Wolfson hasn’t suddenly stopped being prudent) but the change of tone looks significant for the wider retail sector.

Next is a better guide to the consumer mood than the likes of Marks & Spencer, which is a self-help story these days. If it is feeling relatively less bullish about pre-Christmas trading, others will be too. The reasons also matter.

First, the post-lockdown pent-up demand factor was fading, Wolfson reported. Yes, that was bound to happen; the surprise is that the post-lockdown whoosh lasted so long. Second, labour shortages and blockages in international supply chain mean extra costs. Again, that’s not a surprise.

The third factor is the trickiest to read: households being obliged to spend more on essentials like petrol and energy, leaving less for discretionary purchases such as clothes. Consumer finances were still in “good shape”, stressed Wolfson. And he was only talking about “moderation” in spending.

Given that average energy bills could rise by £400-£500 in April, that looks the biggest loose piece in the cost-of-living outlook. Big retailers have generally enjoyed the 2021 recovery (and Next’s £800m would be its highest profits since 2016) but the financial weather looks to be turning.

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