Duelling Fools -- Baltimore Technologies, The Bull Case
What is Baltimore Technologies?
Baltimore Technologies (LSE: BLM) is not an easy business to understand. It develops and markets products that enable other companies to make financial transactions and communications over the Internet in a secure manner.
To quote from its website, its products include: "a wide range of Public Key Infrastructure (PKI) systems, wireless e-security solutions, cryptographic toolkits, security applications and hardware cryptographic devices. Baltimore sells its solutions worldwide directly and through the TrustedWorld channel programme, which are companies licensed as re-sellers of their products. TrustedWorld includes many of the world's leading technology companies and a wide variety of global, regional and local business alliance partners."
Baltimore Technologies now employs more that 800 people worldwide and operates from 28 cities with headquarters in Dublin, London, Boston and Sydney. Baltimore Technologies made e-commerce history in 1998 when President Clinton and Ireland's Prime Minister Aherne digitally signed an inter-governmental communiqué using security technology provided by Baltimore.
OK, but what do they actually do?
Baltimore is one of four companies in the world to specialise in Internet encryption technology for the business to business market. The other three are Entrust Technologies (Nasdaq: ENTU), RSASecurity (Nasdaq: RSAS) and Verisign (Nasdaq: VRSN). Baltimore has been particularly successful in winning contracts to support the Internet activities of banks and governments.
Baltimore has been growing very rapidly. Following the merger of Zergo and Baltimore in 1999, and the adoption of the Baltimore Technologies name, the company has expanded both organically and through acquisition. In 1999 it acquired GTE Corporation's(NYSE: GTE) Cybertrust unit, and at the start of this month the company announced its largest acquisition yet, when it bought (through the issue of shares) the company Content Technologies, which developed the MIMEsweeper range of products and is the market leader in content security solutions.
Baltimore quotes from a recent IDC (International Data Corporation) report, saying that the market for content security is set to grow annually by 71% and will be worth US$952 million by 2004. Content Technologies products enable organisations to implement policies protecting them against confidentiality breaches, exposure to e-mail legal liability, junk e-mail, e-mail-borne viruses, and misuse of e-mail and the Web. Over 6,000 customers and 6 million users throughout the world currently use Content Technologies MIMEsweeper to protect against business and network integrity threats.
The Internet - a revolution that is still happening
After the fall-out among technology and Internet stocks this year, you could be forgiven for imagining that the Internet revolution has now happened and we should all be looking forward to the next great step forward; the Internet is an old has-been. How wrong you could be!
We are still only at the very start of the Internet revolution. In the 21st century, the Internet revolution will change the very fabric of the world-wide economy, and its effects will be as profound as those of the Industrial Revolution in the 19th century. New technology is enabling businesses to become more and more efficient and more and more productive.
The Internet revolution is benefiting businesses; it is increasing the speed and rate of production by compressing the amount of time needed to complete each step of the business process. On an individual level, the availability of instantaneous information allows people to simultaneously do many different things and to take a greater control over the many different activities in their lives.
This Internet revolution will profoundly affect the economy. According to IDC the Internet economy will increase from just US$50 billion in 1998 to a total 'internet economy' of US$4,480 billion in 2004. Now, only US$2,500 billion of this will come from actual internet commerce transactions, in order for commercial organisations to reap that amount in 2004, more money will be spent building technology and business infrastructures in the years leading up to 2004 than the actual amount of Internet commerce transacted. When 2004 arrives, IDC expects to see $1,980 billion in total infrastructure spending, in addition to the US$2,500 billion spend on commerce.
These are big numbers -- no, they are enormous!
Spending on infrastructure includes all the hardware, software, and communications products required to support Internet commerce and a company's Web presence. In addition, spending on business infrastructure includes investments in content, professional services, marketing and sales, and other business costs. The business-to-business commerce segment has the most to gain from the Internet economy. IDC claims that by 2004 the volume of commerce from these "B2B" transactions will represent 88%, or US$2,200 billion, of Internet commerce.
And then there is wireless!
The Internet is about to go mobile, not the mobile WAP systems that we are being sold now, but a mobile Internet that will allow us to control most aspects of our lives and businesses "on the go". Wireless access to the Internet will help initiate a lot of Internet commerce. Access to your own account information, access to suppliers' information, and entering a transaction are all ways that commerce is initiated.
Security is so important
The threat to a business's security systems has always been acknowledged. Attention was focused on protecting an organisation's assets by keeping people away. In today's Internet economy, security presents an opportunity for online business to add value. Implementing security systems and procedures gives online businesses a way to offer customers privacy protection. In the open world of the Internet, protecting customers' privacy is a way to ensure that you keep your customers, suppliers and other partners. An insecure e-commerce business is not a business for very long.
But what about valuation?
Baltimore is a highly valued business, and many will think that it is highly overvalued. Let me make it clear, I have no real idea as to what the correct value of Baltimore is now, or what it will be worth in the future. What I do know is that one thing that is preventing people using the Internet more and more is the issue of security. The Internet security sector is set for massive growth for the foreseeable future, and certainly well beyond 2004. Companies are moving online, not just to use the Internet as a place through which they can sell products, but as a place in which they will operate their entire businesses. They are linking with customers, suppliers and partners and are sharing their most important bits of information; information that must be prevented from falling into hands of competitors or other malicious individuals, information that will have to be controlled.
One company that you really must hold!
Baltimore will benefit enormously from the future growth of the Internet and the increased importance of Internet security. The company has positioned itself as the world leader (outside the US) in its markets and now has a major presence in the USA. It has the potential to become one of the biggest businesses in the world. If I was told that I could only hold one share in my portfolio I would chose Baltimore. The risk of holding the shares is high, but the potential for future reward far outweighs the risk involved. But remember, the share price will be volatile, and it is a share that really suits investors with nerves of steel, and the ability to ride out the short term ups and downs. If you hold shares in Baltimore be prepared for a turbulent ride, but be prepared to hold on for the long term.
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