Shares: A safe pair of hands

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It would be hard to run a real money portfolio looking for the world's Rule Breaking companies, as we are doing at the Motley Fool, without thinking about the internet with its myriad of tentacles. There is no way we would jump on to any bandwagon and just buy anything with .com in its name though, as many people seem to be doing these days.

No, we would only consider buying shares in companies that we understand and that we believe have a very good chance of being among the long-term leaders of electronic commerce.

As with any emerging technology there are plenty of starters but far fewer finishers, and e-commerce markets will surely be no different.

So what precisely are we looking for? We're looking for companies that are clearly the leaders in their industry (and "internet" isn't a single industry, by the way, no more than "high street" or "out of town shopping centre" comprise single industries). And it must be an important industry too, so we won't be considering e-meringue.com, or any passing fads that we come across.

What is the biggest worry that most people have regarding the use of the internet? Here's a clue: it is a worry that applies to the use of credit cards for buying things. That's right; people are worried about security. When it comes to shopping on the web, that worry is largely overblown. In fact, there is more risk of fraud occurring when you let a waiter at a restaurant take your card away for payment, or allow a filling station cashier to swipe your card out of your sight.

Some internet companies, and Amazon.com springs immediately to mind, even guarantee to refund the cost of any fraud that might happen when using their site for purchases. So if retail sales, where the individual amounts of money winging their way across the wires are pretty small, is not really the area for growth in the online security business, then what is?

How about banking? That's certainly a business that needs watertight security. In fact, big business transactions of any kind seriously need to be protected, and that is where a European company that specialises in this area comes into the picture.

Baltimore Technologies plc was born from the merger of Zergo Holdings, with Baltimore Technologies. It specialises in Public Key Infrastructure (PKI) systems, cryptographic tool kits, security applications and hardware cryptographic devices.

And if that sounds like cryptobabble, it really just means encryption technology. PKI is the globally accepted standard in cryptography these days, and the market for it is going to be big. There have been many estimates of its potential size, but it is almost certain to reach tens of billions of dollars a year before we get too far into the next millennium.

Baltimore's third-quarter sales, for the three months ending September this year, amounted to pounds 6.4m, which was 63 per cent up on the same quarter the previous year. The company did record a big loss, of pounds 24m, in the first nine months of the year, though that was pretty much in line with its plans. And it is just about the only global player in the PKI business outside the US.

So how did Baltimore get into its position? The American government's paranoid, and rather stupid, ban on the export of industrial strength encryption products certainly left the global market wide open. And it is into that void that Baltimore stepped. But the world market is opening, and American companies will be important contenders.

So who is Baltimore's competition? The company itself sees Entrust Technologies as the market leader. Entrust has offices in Canada, the UK, Switzerland, Germany and Japan, although its headquarters are in Texas. Total revenues for the second quarter of 1999 increased 80 per cent to $19.8m (pounds 12.4m) from $11m the previous year, and the company also reported a fully diluted net profit for the quarter of two cents a share. Serious competition, then.

Another American company, VeriSign, may also be a key player. VeriSign had a first quarter turnover of $15.6m for the quarter ended 31 March, 1999.

And finally, we must never forget Microsoft. While Windows 2000 will have PKI capability built in, banks and other high security businesses won't even think of using it for two years at least, and many of the most important security areas of these businesses will have nothing to do with desktop PCs or PC networks anyway. But the Microsoft monster can never be ruled out.

So is Baltimore a good investment? That's a personal decision, of course, and we're not really sure yet, particularly at today's heady price.

As one of our message board regulars has pointed out, the share price levels of the big PKI competitors seem to be based on each one of them grabbing the lion's share of the market, which is something they obviously cannot all do.

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