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Hackers, Highlanders and Trojan horses
How to profit from lawlessness and swindles on the information superhighway
by Christian DeHaemer
On Friday, June 30th, President Bill Clinton took time away from whatever it is he does these days and signed the Electronic Signatures in Global and National Commerce Act — a law that enables electronic signatures to carry the same legal weight as pen and paper.
It was the usual smarmy politico babble: "fresh momentum to the longest economic expansion in our history" ... "almost unlimited potential" ... "expand opportunities" ... "if we can save one child from using a pen" ... (OK, so I made that last one up.)
 The mouse is mightier than the sword
A few days earlier, on July 10th, Irish President Mary McAleese electronically inked Ireland's new Electronic Commerce Bill, which also makes electronic signatures as binding under Irish law as a drunken oath sworn against the British.
Sweet Mary used an e-security system developed by Irish-based Baltimore Technologies (BALT:NASDAQ).
Know Nikes
Incidentally, on or before June 21, 2000, somewhere in the world, unknown scalawags penetrated a Scottish ISP by the name of FirstNet. It was a flanking attack against Nike — the ancient god of cobblers who had the immortal power to manufacture shoes for about the cost of a spinach pie and sell them for one hundred and ten drachmas.
In this case the victim was Nike.com, the modern incarnation of the ancient demigod, known for its pseudo-rebellious athlete endorsers and its sweatshops in Indonesia.
The mad instigators of this insidious plot redirected e-mail from Nike.com to an anti-Nike activist site in Australia. Nike insiders acted quickly, took up arms and requested that the highland ISP redirect traffic back to its servers as an emergency measure, while Nike counterattacked in resolute effort to regain control over its domain name.
Nike climbed once more into the breach and was victorious. However, as it basked in the spoils of war, Nike forgot its allies. When FirstNet submitted an invoice for its services, Nike demurred, refusing to pay.
I Love You, et al
This is far from the first instance of online warfare, and it certainly won't be the last. We have all heard and grown tired of the e-wars on e-mail. NASA, the CIA, the Defense Department, even your own humble site, taipanonline.com, have been beaten and battered by the unseen forces of virtual guerrillas.
The difference with this particular battleground is that it ended up in the courts. You see, FirstNet has the awkward and irrational desire to be paid. And not just for a nominal sum, either — the Highland technocrats aim to claim recompense for the disruption caused by the vast quantity of traffic generated by Nike.com.
In fact, FirstNet claims that Nike's poor security is responsible for the cybercrime and should be held responsible for the ensuing commotion.
So tight they'll explode
The upshot of this particular cyber-sin is that any particular company, perhaps even yours, might be held responsible for unsecured transactions. This is new, or nouveau, anyway. Couple this trend with the recently enacted laws allowing contracts to be signed via e-mail — and you has got you a big problem.
I've always said that the point of business, and therefore investing, is to find problems that need fixing and then buy the solutions.
Baltimore Technologies
At Taipan we've been talking about online privacy protection for a number of years. We turned you onto PGP (Pretty Good Privacy) back in 1996. And Jeff Siegel on the Taipan e-dispatch has been ranting about this stuff for the past few months. But we were ahead of our time. The time to profit is now.
There is a company that will benefit greatly from this ongoing problem and you've heard about them before. They are go by the name of Baltimore Technologies plc.
Baltimore Technologies is the third largest company providing e-security solutions for the Internet, e-business and mobile commerce. It is an innovator in Public Key Infrastructure (PKI) products and services, wireless security, cryptographic toolkits and the like. BALT sells software worldwide to organizations like VISA, The Australian Health Insurance Commission and Price Waterhouse Coopers.
Knowing the secret code
PKI is the leading solution for electronic coding. You see, cryptography encodes a message using a secret key associated with an algorithm.
This produces a scrambled version of the message that the recipient can decrypt using the original key. The key is kept secret between the two parties. The hard part is managing these keys and keeping them secret while still allowing for easy communication.
PKI solves this problem by replacing the secret key with a pair of keys, one public and one private. Information encrypted using the public key can only be retrieved using the complementary private key. Public keys of all users can be published in open directories, which makes its easy for all parties to talk amongst themselves. Furthermore, public and private keys can be used to create and verify "digital signatures."
In short, Public Key Infrastructure is the software and methods that defines the management, distribution and storage of these keys.
According to Datamonitor, PKI is set to be the fastest-growing segment of the e-security market. It is expected to double six times between 1999 and 2003. IDC forecasts the global market for PKI products will be worth US$1.4 billion in 2003, compared with just US$123 million in 1998. Taipan believes the numbers will be much higher, due to the fact that the computations are old and only include the PC model, not the explosive growth of the mobile Internet market.
 Triple threat
It's a high growth business and there are three big players: Entrust Technologies (ENTU:NASDAQ), Baltimore Technologies (BALT:NASDAQ) and the monster in the field, VeriSign (VRSN:NASDAQ).
VRSN has a market cap of US$20 billion and trades at a price-to-sales of 183.45. They grew revenue 63 percent year over year and 23 percent sequentially in Q1 00. Currently their share price is down to US$172 from a high of US$258.
ENTU has a market cap of US$1.71 billion and trades at 18 times sales with a P/E of 201. Revenue grew 54 percent year over year and 12 percent sequentially. Its share price has been bitch-slapped down to US$31 from a staggering US$150 in March. Most of the damage was caused recently, when ENTU pre-announced that it would earn 7 cents a share for its Q1 versus the street estimate of 15 cents. That'll do it.
Baltimore Technologies has a market cap of US$3 billion and trades at 180 times sales. They grew revenue at 66 percent year over year and 100 percent sequentially in Q1 00 — up to US$15 million from US$7.5 million. That's the best growth numbers in the group.
In fact, software revenue grew 800% over the same quarter last year. Software license revenue now represents 55 percent of total revenue. These numbers suggest that there is a growing demand for BALT's software products, and that it won't meet with ENTU's sorry fate.
 BALT's share price is around US$15, down from US$45, or 70 percent compared to a drop of only 50 percent for VRSN. BALT trades at a severe discount to VRSN relative to its growth rate. This is due to VRSN's high visibility in the United States and its consistent 100-percent growth rate per annum.
Given this growth rate, VRSN will bring in revenues of US$162 million for 2000 with a market cap of US$20 billion. BALT will likely bring in US$71 million with a market cap of US$3 billion. Granted, VRSN has a longer track record and should trade at a premium. But a 240 percent premium is absurd. Historically VRSN has traded at a 100 percent mark-up over BALT.
Catalysts for upside
First: Along with the obvious upside through revaluation, there has been an improvement in the company's fundamentals over the past six months through acquisitions and changes in strategy to go after high-growth software segments such as PKI.
Secondly, BALT's software is the only one that will integrate easily with companies that want to, or have, insourced their PKI. It's a hybrid solution that meets the pragmatic difficulties of the market.
Third, BALT has made a number of acquisitions in Japan, which Taipan believes will be a turnaround story going forward. Partners include NTT DoCoMO, Softbank and Tokyo Electric Power, among others.
But the biggest catalyst for share price appreciation is the growth in mobile commerce. Though this market is still in its developmental phase, BALT is well positioned to take advantage of the problems of wireless-based e-security.
There you have it
Baltimore is not for widows and orphans, as they say. But it is a high-growth business with plenty of buzz. The chart looks like it has put in a solid bottom and is just about to cross over its moving averages, thus signaling an uptrend.
With the new laws regarding e-signatures and the constant threat of hackers, Baltimore Technologies looks like a good bet for the foreseeable future. Taipan believes this is a fantastic way to play the summer rally. Buy BALT today under US$16.
In addition to his duties at Taipan, Chris DeHaemer is the editor of The Hammer.
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