Wave Systems and Growth in the Computer and Network Security Market (WAVX, ATML, BRCM, STM, DELL) by Next Inning | July 14th | Filed in: Stock Analysis
Management of computer and network security has become a priority for businesses, government agencies, and individuals as the compiling and storage of ever increasing amounts of information on multiple computing platforms has amplified the risk of data theft. A broad range of potential security approaches are maturing, and providing investors opportunities to consider speculation in emerging players like hardware-based security specialist Wave Systems (WAVX), according to Next Inning Technology Research Editor Paul McWilliams, whose model portfolio has outperformed the S&P 500 by a ratio of nearly seven to one since 2002.
“We all want better security for the data stored on our individual computing devices to protect against identity theft and the potential exposure of credit card information, health records, and other sensitive data if the device is lost or stolen,” McWilliams said. “And the networks must be protected against the potential for data theft, destruction, or corruption. As a result, the corporate IT departments are spending tens of billions each year trying to create more secure computing platforms.”
Next Inning notes that there are three fundamental ways to protect networks: personal responsibility (name and password), software-based systems (tokens), and hardware keys, which come either permanently attached to the computing devices (soldered to motherboard) or plug into the computing device. The Trusted Computing Group, a non-profit organization promoting industry standards and the use of “trusted” computing building blocks has established a hierarchy of recommend security layers: user ID and password, secure user token, Trusted Platform Module (TPM), self-encrypting drive (SED), and secure server.
TPM is at heart of the Wave Systems security strategy, and the company receives royalties for its TPM client side software. TPM is an industry standard semiconductor chip that is manufactured by multiple sources, including Atmel (ATML), Broadcom (BRCM), and STMicroelectronics NV (STM). McWilliams believes that a TPM chip has been attached to the motherboard of every business class PC running Vista or Windows 7, a total of about 475 million PCs shipped with TPM chips. According to Wave Systems, there have been about 85 million TDM chips shipped with its client side security software, with about 80 million of those in Dell (DELL) systems.
The Wave Systems business model is to sell server based systems that give companies and government organizations the ability to manage network security and/or SEDs. For this, Wave Systems normally charges about $50 per seat and targets annual maintenance fees of about $12.50 per seat. It’s biggest deal so far is with GM (GM), which uses its SED management software. However, so far, Wave Systems generates the vast majority of its income from the client side.
On the client side, Wave Systems makes most of its money selling client software that leverages the TPM chips installed in all business class Windows PCs. This charge ranges from around $0.30 per installation with Acer and ASUSTek to $0.93 Dell. Dell’s charge is higher because it uses a highly enhanced version of the software. In addition to this, Wave Systems also makes about $0.03 per TPM chip from a sliding royalty scale that is based on the aggregate volume of TPM chips shipped by the various manufacturers.
McWilliams’ full, 12-page report on Wave Systems includes in depth analysis, information gathered from interviews with Wave Systems’ executives, and McWilliams outlook for the stock and is now available for free to trial subscribers of Next Inning. In the report, McWilliams lays out his investment thesis, outlines the potential upside for Wave Systems shares, and determines whether investors should consider adding shares now.
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