Darktrace Short Interest

Looking at the short selling data on Darktrace, one thing stands out and that is that short interest has spiked in the last month.

One month ago, approximately 16.7 million Darktrace shares were on loan. Today, however, the figure is 34.4 million (the highest number of shares on loan since the company went public in 2021). That represents an increase of 106%. This is a red flag, in our view, as sharp increases in short interest are often followed by share price weakness.

It’s worth noting that 34.4 million shares equate to around 10% of the free float. That is a relatively high level of short interest for a UK-listed company. This is another red flag, in our view.

Short Seller Report

What’s interesting is that this sharp spike in short interest coincides with the release of a short selling report on the company by New York-based firm Quintessential Capital Management (QCM).

In its report, the short seller states that:

It is skeptical about the validity of Darktrace’s financial statements and believes that sales, margins, and growth rates may be overstated.

It has detected the presence of serious accounting red flags.

It detected numerous suspicious transactions in the period leading up to the company’s 2021 IPO.

Increasing competition, high churn rates, and lack of sustainable cash generation point to a rapid deterioration in the company’s financials.

It is of the opinion that Darktrace’s financial statements may not be relied upon.

Regulatory filings show that QCM currently has a 1.3% short position in Darktrace.

Now, Darktrace has come out and refuted QCM’s claims. It has said that it has “full confidence” in its accounting practices and that it has "rigorous controls” in place to ensure it complies with account standards.

And management has put its money where its mouth is. Not only has the company launched a new £75 million share buyback but CEO Poppy Gustafsson has purchased 48,000 shares (appox. £108,000 worth of stock) in the company herself.

Clearly, management believes that it’s in the clear.

However, given the sharp increase in short interest here, we think caution is warranted towards the stock in the near term. It’s generally not wise to bet against the short sellers.