Why did the Covata Ltd share price suddenly soar 20%?

Credit: Mervi Eskelinen

What: The share price of cloud-based security software solutions provider Covata Ltd (ASX: CVT) soared 20.4% on Wednesday to close at 29.5 cents.

That takes the stock’s price around 50% above its 52-week low of 20 cents but it’s still off 40% from its one-year high of 54 cents.

So What: The share price surge came in response to an announcement by Covata that it has entered into a reseller agreement with the UK Government’s Foreign and Commonwealth Office Services (FCOS).

The FCOS is linked to the Foreign Commonwealth Office which is charged with protecting British interests around the world, employing 14,000 people in nearly 270 diplomatic offices such as consulates and embassies.

Covata’s lead product, Safe Share, will be utilised by FCOS who also operates trusted infrastructure, which is a key factor in securely sharing files in a cloud-based system.

Now What: The signing of the FCOS agreement comes in addition to Covata’s other opportunities which include its telecommunications channel subscription model. It’s worth noting comments by Covata that it expects the value of the FCOS subscription fees per user to be double the telco channel given the benefits of currency conversion.

Software security is a hot topic at the moment and the volatility in Covata’s share price over the past two years is testament to this hot market.

With a market capitalisation of around $140 million the stock is certainly on the radar of small-cap investors, however, as investors have seen before with the $2 billion XERO FPO NZX (ASX: XRO) for example – small software companies in attractive niches can command big market values long before they start printing large profits.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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