Security:
VeriSign Seems A Secure Pick -- VeriSign has the upper hand, but it's not clear whether the vendor is the runaway leader in public key infrastructure
Sep. 15, 2000 (InformationWeek - CMP via COMTEX) -- Security remains a huge hurdle- physically and psychologically-to E-commerce success, so the two will progress hand-in-hand. One of the fastest-growing security segments is public key infrastructure, or PKI. The concept is an electronic extension of cryptography: A key is combined with data to encrypt it, and it can be deciphered only by the holder of the private key. The best-known name in the PKI business is VeriSign Inc. (VRSN-Nasdaq), but there are others you don't want to overlook.
If you want the easy out-but not necessarily the best investment choice-pick VeriSign. It dominates the fast-growing Web-server market, which is primarily an outsourced PKI solution that allows secure transfer of information between authorized Web sites and clients. Priced at around $172 per share, with an equity market capitalization of $31.2 billion, it's off its 52-week high of $258 but a lot higher than its 52-week low of $48. It recently acquired domain name vendor Network Solutions Inc., which has added revenue and profits. In the recently reported second quarter, revenue reached $70.3 million, up 275% year over year, thanks in part to the $28.9 million from 22 days of revenue from Network Solutions. Earnings per share-which reached 3 cents for the quarter from zero last year-are predicted to be 44 cents for 2001, of which 10 cents will come from Network Solutions.
1)VeriSign:
VeriSign has strong margins at 68%, including Network Solutions; revenue prospects at an estimated $1 billion for 2001; and solid cash flow, generating $20 million in the quarter. The big risk, however, is price. There's little room for execution error or a slowdown. The domain registration business isn't nearly as sexy as the security business, so it remains to be seen whether this acquisition will pay off.
2) Baltimore Technologies plc:
Baltimore Technologies plc (BALT-Nasdaq) offers a more international play. European business makes up about 40% of its revenue, with another 26% from the United States-compared with 69% at VeriSign. At around $23 per share, with a market cap of $4.2 billion, it, too, lies in the middle of its 52-week range of $45 to $6. Second-quarter revenue was about $23 million, up 220% year over year, but resulting in a $6.2 million loss before interest, taxes, depreciation, and amortization. In the second quarter, its more U.S.-focused GTE CyberTrust acquisition was integrated. Revenue for 2001 is estimated at more than $155 million, and 2001's loss is estimated to be 11 cents per share. Gross margin was 64.1% in the second quarter, down from 67.3% in the first, and the company targets profitability by the end of next year.
3) Certicom Corp.:
Certicom Corp. (CERT-Nasdaq) is the best way to play wireless PKI, since 57% of its revenue comes from wireless deals. At $35.75, with an equity-market capitalization of $914 million, the share price is a long way from its $83 high. Its small and efficient proprietary elliptic curve cryptography is ideal for many wireless applications and devices. First-quarter revenue of $5.1 million was up 135% year over year, and its gross margin was 75.2%, up from 72.5% last quarter. Its average deal size was about $150,000 during the quarter, up from about $100,000 in the first quarter. Motorola represents more than 10% of revenue, but last quarter, Certicom signed deals with Oracle, 724 Solutions, Sony, and Sybase. The company has no debt and $54 million in cash, allowing it to ride out an expected 74-cent-per-share loss for fiscal 2001 (ending in April) on estimated revenue of $26 million.
4) Entrust Technologies:
Entrust Technologies is probably the cheapest PKI play because it badly missed recent earnings estimates. The stock plummeted from its 52-week high of $150 to $28. Entrust is the leader in in-house PKI, serving customers who want to build and internally manage their own PKI. It depends on large clients: More than a quarter of its second-quarter revenue of $29.3 million came from its top five customers, and it earned 3 cents a share. The loss of four deals worth about $3 million trampled earnings expectations, but it still has a gross margin of 76%. Revenue and earnings estimates for 2001 are $235 million and 34 cents per share, respectively. But in this sector, even a trampled stock demands a healthy premium-a price that's 82 times earnings.
At this point, I would buy the basket. VeriSign clearly has the upper hand today, but it's not clear yet whether it's the runaway leader. There's a lot of risk in that price, and we know how quickly the landscape can change.
William Schaff is chief investment officer at Bay Isle Financial Corp., which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com. |
