Can Virnetx (NYSEMKT:VHC) become the next high-growth company like Google (NASDAQ:GOOG)? It’s possible. It owns patents to a technology that will be invaluable in the future: 4G internet security. This new technology will become more and more important as the number of internet devices grows exponentially over the next few years. Cisco estimates that we will see in excess of 50 billion internet devices by the year 2020. IBM estimates we will hit 1 trillion by the same year. Right now we are sitting at about 2 billion.
We know Virnetx is in the internet security business, but just exactly what does it do? It provides a technology that allows internet devices to securely communicate with each other through automatic encryption. The level of internet security that is available now is obviously ineffective. Corporations, government agencies, and banks are getting hacked routinely.
In 2010 a group of criminals stole $70 million using a computer virus to capture bank account details from unsuspecting users. Earlier this year, Citigroup lost personal credit card information for more than 200,000 users to a hacker group known as Anonymous. The beauty of the Virnetx system is that it makes it nearly impossible for anyone to intercept and interpret the data, thus providing a level of security way beyond what we have now.
Encryption is pretty easy to understand. Basically you just change the data, so that if someone else could actually intercept the data, they would not be able to understand it. It’s like sending something in code where no one else has the key. There is no higher form of internet security than encryption. The beauty of the Virnetx system is that this encryption happens automatically. If users were expected to do it manually, they wouldn’t always do it, and security breaches would be frequent. But, with automatic encryption, the protection is instantaneous, guaranteed, and best of all, easy.
4G will definitely become the standard in the future. I think of 3G as a winding country road, where cars can reach their destinations, but traffic is definitely limited, and extremely slow. 4G is like a 10 lane superhighway. It’s big and fast. In the future staggering amounts of data will be transmitted through 4G infrastructure. As the amount of data amplifies, the need for security will only increase. Virnetx provides a solution, and the potential for growth is astounding.
As of right now Virnetx is not aware of any competitors in this arena, and given its patent portfolio, it stands on firm legal ground if anyone were to begin infringement. It’s possible that the Virnetx technology will be involved in every 4G transaction, which gives it tremendous revenue potential.
What’s the risk? Well the obvious risk is that Virnetx technology does not become the industry standard for 4G security. That could happen. But, as of right now it appears to be the only company with the essential patent portfolio for security that 4G systems will require.
What’s the likely outcome from here? I think that Virnetx will sell its patent portfolio to a larger company. If that were to happen, we could see a 100% to 200% increase in the share value. Remember that Cowan and Company has valued the patent portfolio at $2.8 billion. A buyout would probably be for $50-$75 per share.
Keep in mind that this July's sale of Nortel's (OTCPK:NRTLQ) patent portfolio to a consortium of companies for $4.5 billion, was driven largely by its 4G patents. Apple (NASDAQ:AAPL) alone put up $2.6 billion. Today Google announced that it was buying Motorola's (MOT) mobile division (NYSE:MMI) for $12.5 billion. As 4G deployment gets closer to fruition, the value of 4G patent portfolios will only increase.
The other option is for Virnetx to hold onto its patent portfolio and generate revenue through litigation and royalties. If this were to happen, we could easily see a share price of over $100 in a few years.
From the beginning, I have wondered about the legitimacy of this whole story. I was offered a position in a secondary at two dollars per share. I declined because there was no evidence that what it was doing had any solid footing. Virnetx were suing Microsoft (NASDAQ:MSFT), and I believed the likelihood of a positive outcome for Virnetx to be miniscule. But, I was wrong. It beat the software giant in a court battle that surprised many. The Vernetx victory over Microsoft provided legitimacy, and I began buying at five dollars per share. That victory keeps me interested in this company as an investor. It obviously has something of value, and this could be the beginning of a long string of successes.
I am still cautious, and am only investing what I consider to be high risk capital. But, I do want to be invested because I think the potential here is phenomenal, and I would hate to see a $75 per share price on the table after I sold all my shares.
Disclosure: I am long VHC.