Investors looking to ride a wave of rising share prices for encryption companies following White House policy revisions that would loosen export controls for such software have found themselves in the doldrums.
Stock prices in such encryption-related companies as Security Dynamics Technology (SDTI), Cylink (CYLK), and Information Resource Engineering (IREG) are virtually trading in the same range today was they were in October, when the White House unveiled its revised encryption policy.
Encryption uses coding to scramble data and is designed to allow recipients of the information to hold "decoding" keys to unscramble the data. Companies in the past have been prevented from exporting stronger encryption software, unless they jump through numerous regulatory hurdles. The companies, however, are allowed to sell the stronger encryption software in the United States.
Under President Clinton's plan, companies can export the stronger software, providing a third party such as a court or government agency is also allowed to hold a the "decoding" keys in escrow. Encryption companies hope to enlarge their base of customers with the policy change, but they question whether customers will choose a "key escrow" system when overseas competitors can sell similar products without the restrictions.
Analysts say several issues have kept encryption stocks from soaring after the White House announcement. "The products don't exist yet, by and large. The products that are needed to satisfy the government's requirements must either be altered from existing software used here in the United States, or it has be made to accommodate key recovery," said Paul Merenbloom, analyst with Piper Jaffray. He added that it may take as much as three to nine months before the revised software hits the market.
And then there is the issue of investors remaining confused. "This is a complicated business, and if investors can't understand what a company is doing, how comfortable will they be making an investment?" Merenbloom asked.
Meanwhile, Eric Zimits, an analyst at Hambrecht & Quist, said investors may be waiting to throw more money at the companies once the products are rolled over the next several years.
"If the policy had taken a negative direction, then we would have seen the stock react negatively," Zimits said. "But the market may have already accounted for this. The feeling is that whatever the policy we have today can only get better."