This morning internet security company iWebGate Ltd (ASX: IWG) announced that it has signed a deal to provide network security services to Telstra Corporation Ltd (ASX: TLS) customers. The share price was up 3.8% in trade earlier today.
An agreement was struck with US-based AppDirect, an online commerce platform, to sell iWebGate's Workspace Suite of products to Telstra customers through Telstra's online Apps marketplace. iWebGate will receive 70% of sales and Telstra will actively market Workspace Suite to its end users.
The deal provides iWebGate with a large revenue opportunity and validation of its technology. It seems unlikely that Telstra would want to offer Workspace Suite if it wasn't any good. On the other hand, selling third party apps is an easy way for Telstra to grow revenues without making an investment.
AppDirect will be responsible for providing customer service and iWebGate's managing director, Mark Harrell, appears happy with this. He said, "we are pleased to be working with AppDirect to deliver the highest level of customer service to end users of our product"
Data security is a hot industry right now because the number of cyber-attacks has risen in recent years and current defences have proven insufficient. There is a big incentive for companies to develop solutions to this problem and capital is readily available as investors are keen to share in the spoils.
Consequently, competition is fierce and junior operators like iWebGate have their work cut out. Not only do they have to beat countless other start-ups, but they are also up against global IT majors.
The other risk for investors is that given the hype surrounding the industry, share prices are high and could come tumbling down should sentiment change. iWebGate has a market capitalisation of $161 million and Covata Ltd (ASX: CVT), another recently listed data security firm, is valued at $111 million. Neither company has generated any significant revenues so far.
A change of market mood isn't a problem if the company you are backing is able to deliver on its promises, but the chances are that most IT security outfits will not. Given how difficult it is to understand the technology involved, picking the winners is extremely tricky for most investors.
One data security business I own is Senetas Corporation Limited (ASX: SEN), but I am uncomfortable with its current market value of more than $200 million. However, Senetas differs from Covata and iWebGate in that it is already profitable and its technology has been around for decades.
If iWebGate sounds a little too speculative to you then perhaps you would be more interested in the two small-caps contained in the free report available below. They still have the potential to deliver massive gains but are already established business.
