Replies to post #184907 on Zeev's Turnips Patch-No Politics (ZEEV)

[Bruce A Thompson]

Don't know. Could be. EOM

[Dances-W-waves]

I think your sub 1900 may be delayed a bit. <g> It's Christmas...can't close red.

[TREND1]

The WAVX story.
Do not miss may violate safe harbor rules.

Ahead of the Curve

Updated: 19-Dec-03 15:03 ET

The Lesson in Wave Systems

[BRIEFING.COM - Robert V. Green] Once again, a single stock provides a lesson for all investors, whether you were invested in it or not. The company reported last night that the SEC is investigating Wave Systems (WAVX) for possible violations of public disclosure rules and trading activity. Within this story are a few simple principles that unfortunately, get repeated all the time.

The Background
Wave Systems is a developer of software to provide security for digital data. They make software to prevent unauthorized copying of any soft intellectual property (software, music, text files) and software for encryption and certification for online transactions. Most of this software is designed to be used as firmware in chips that are an integral part of the hardware of a PC. As a hardware component, the programs would be harder to circumvent.

Wave Systems has been around for years and was a favorite of daytraders during the bubble era. But they have never really sold very much. Their best quarter was Q3 of 2001 when revenue hit $224,000. However, revenue in Q1 of 2003 was an incredibly insignificant $17,000 or roughly $300 per day.

Nevertheless, the company carried a market capitalization of around $50 million, set by believers in the future of trusted computer.

On July 31, Wave Systems announced that they had signed a deal with Intel to integrate their firmware into chips on Intel motherboards.

Shortly after this announcement, the following events occurred:

Date Event Stock Price Mkt Cap Millions Volume Millions
Jul-30-03 Day before Intel PR $ 0.84 $ 50 0.14
Jul-31-03 Day of Intel PR $ 2.25 $ 140 18.9
Aug-01-03 Highest Volume $ 3.65 $ 230 63.7
Aug-05-03 Highest Price $ 4.53 $285 40.2
Dec-18-03 Day before SEC PR $ 1.81 $115 0.36
Dec-19-03 (midday) SEC Investigation $1.53 $100 0.9

If you traded anything during the bubble era, this type of stock action should look familiar.

It's the same old daytrading party, where the momentum and technical players climb onto a news event, take over the stock for a few days.

The proper metaphorical image for this is that of teenagers taking over a parent-less house. They party heavily, destroy a few things, and then disappear leaving a big mess of broken beer bottles scattered across the front lawn.

The SEC Investigation
The announcement by Wave Systems today has few details about the nature of the allegation by the SEC. However, the statement contained certain phrases that have clear implications.

Phrase Implication (Briefing.com Assessment)
Investigation "...relates to certain public statements made by Wave during and around August 2003" Management spoken statements implying tremendous revenue potential may violate safe harbor rules.
Investigation into "certain trading in Wave's securities during such time" Possible insider trading prior to press release.

We have no knowledge of the actual goals of the investigation. In addition, not all SEC investigations result in findings of violations.

The real problem is that investors in Wave Systems took the very limited information provided by the company and extrapolated it into extreme growth possibilities - and the resulting stock action attracted the momentum and technical daytraders.

Results in Q3
Wave Systems does have a deal with Intel. The following url lists the Intel product that contains the Wave Systems product: http://developer.intel.com/design/motherbd/rh/index.htm.

This product was available for sale in Q3, apparently, but there was no real impact on WAVX Q3 revenues.

No details of the deal have ever been released. The deal might be exploratory, with little payment due to Wave Systems upfront and very small royalties on sale of individual units.

There also is no competitive advantage, to our knowledge, of Wave Systems technology versus other types of security software for trusted transactions or encrypted data. Without such advantage, demanding high royalty payments on embedded software.

Furthermore, Wave Systems believes that their ultimate revenue stream will come from deriving a percentage of trusted transactions or providing services, such as management of trusted keys for corporations, rather than the sale of software.

If this latter concept is truly the long term strategy for Wave Systems, then management should cut any deal they can, including giving the software away, to build a platform. Such a strategy would mean an Intel deal is only a tactical step with little revenue potential.

Add to this mix the fact that trusted computing, while widely talked about and publicized, is still far from established as a marketplace.

Traders who rushed to Wave Systems in the first week of August did not care about those issues. All that matter was the feeding frenzy.

Very few investors who rushed to Wave Systems in the first week of August ever examined these issues, we feel.

Unfortunately, it is usually the "investors-who-didn't-research-the-stock" who wind up owning the stock after the frenzy.

The Principles To Be Learned
A lot of people made a lot of money in the first week of August trading WAVX.

A lot of people also lost a lot of money.

The people who made money probably understood the major principle in daytrading: knowing when to get out is more important than knowing when to get in.

For those people who lost money during this first week, we offer the following principles that are applicable to Wave Systems, but also to many concept stocks.

1. Do not confuse trading with investing. Many investors rushed into WAVX in August thinking they were seeing the last chance to buy in cheaply. That, sadly, proved very wrong.

2. Do not swallow "If/then" projections of revenue. Wave Systems CEO is fond of making statements such as "If we make $0.50 or a dollar for software in a bundled platform, we believe we can make $20 or $30 a year off of the services relationship with an end-user desktop." There is simply no evidence of demand yet from consumers or businesses, for payment on a subscription basis for trusted transactions. There may never be such demand.

3. Do not draw a relationship between a contract announcement and revenue potential when no details are disclosed. Wave Systems does have a deal with Intel. However, with no real proprietary advantage over other security software vendors (there are many), it is far more likely that Intel cut a deal with Wave Systems simply to explore the market, not to establish an industry standard.

4. If you are an investor, but find yourself in the middle of a speculative trading frenzy, concentrate on current profits, not future profits. The way traders lose money in a frenzy like this is when they focus on the future potential of the stock, rather than taking profits. Focusing on what you might lose by selling too early, instead of taking a profit now, is the way you wind up losing your current profits as the frenzy unwinds.

5. If you are a trader, let the buyers be the speculative ones. Once you have bought, you need to shift to being a profit-taker. Remaining a holder in a frenzy, on the idea that you will be giving up future profits if you sell now, usually means you lose your paper profit, particularly if you hold it overnight.

Some lessons seem to have to be learned over and over again by the investing public. The market is usually happy to oblige.

Comments may be emailed to the author, Robert V. Green, at [e-mail]

[wecus]

It's semi-virtual <g>. The falling penguin must have been for real as there's a whole mgp made of the same scene but with different cause (aka penguin) for the drop. It's *very* well done and extremely funny if you can see whats actually happening...

anyone who's interested can get a copy of the 368x288 mpg movie (390 k) from me by mail, just post an adress or mail me.