I have discussed in my first two columns the broad thematics governing global markets and where we see some attractive opportunities as well as the unique situation of the Australian equity market outperforming that of the US.
This week I wanted to focus on an excellent opportunity in the small cap area of the market. There are three things I like to say that are guaranteed – death, taxes and IT problems – given the new age world we now live in. As all of us can appreciate and attest to, IT problems can come in a variety of forms. From internet connections dropping out to computer hardware failure, the list is endless but for major corporations the biggest IT issue would have to be data security breaches.
Data security breaches across the globe has been one of the hot topics across mainstream global media with a significant increase in the number of hacking attempts and the subsequent successful capturing of data including username, passwords, emails, intellectual property and credit card details. Global companies that have been on the end of such data breaches include Target(US), Sony, JP Morgan, Morgan Stanley and even the White House.
One small cap newly listed company is in the business of data security and just announced the signing of a major ten-year global licensing deal with Cisco Systems Inc. Covata (CVT) will license its product and platform technologies to Cisco globally to be adopted by its clients or to be incorporated into Cisco products.
Cisco’s reach in the world of IT is significant with over 70,000 business customers across more than 165 countries, giving it a market cap of almost US$150 billion. For a small $200 million company this is a significant milestone and in all essence – “company transforming”.
While details of what revenues can be expected from this deal are unclear, the current market valuation placed on Covata is too small for the market size that it has now managed to gain scale to. When we add the other similarly major deal that Covata signed recently in Europe with T-systems, the company has a significant global reach.
As clarity surrounds the revenue streams coming through to Covata from their revenue sharing arrangements, it can be expected that the market will begin to further appreciate the potential profitability of this company and immense opportunity it has to transform into a seriously well sized business.
The share price performance is reflecting the “company transforming” deals recently signed but despite the strong rally seen since listing at 20c – there is significantly more upside to be seen. It is rare locally to see a local IT-related stock to undergo a Nasdaq-style rally but Covata is one that clearly fits the bill.
Sometimes it is important to look past the traditional investment metrics of price to earnings ratios, dividend yields, profitability etc and just look at the industry scope and product positioning a business has. In the case of Covata you can also add its global partners to the mix and a market cap of circa $500 million I believe is in reach with the right market conditions.
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