Allot's share price ought to reflect its risk

Shmulik Shelach

Investors have shrugged off possible future charges of helping telecom giants invade customers' privacy.

If the "Bloomberg" article that Allot Communications Ltd. (Nasdaq:ALLT; TASE: ALLT) sold communications equipment to Iran had not included such serious allegations, everyone who knew the Israeli company would have burst out laughing. Allot? Involved in espionage? Maybe this is just a clever spin designed to achieve greater media exposure for company products?

Last Friday, "Bloomberg" claimed that Allot had indirectly sold its Internet-monitoring solutions to Iran. The article claimed that the company's equipment was exported to Denmark, where it was transferred to a contact person, who changed the name of the product and sold it to Iran. In response, Allot said, "Beyond contractual measures, there is no electronic way for Allot to locate or disable its products after shipment, unless the end-user proactively initiates a connection. Each distributor is generally assigned with a specific territory and is authorized to market Allot’s products only within that territory." It added, "Allot’s products are not defense items and are designed and intended for the civil market."

Allot supplies technology to identify and track Internet content, capabilities that are probably also used for less salubrious activity when put in the wrong hands. The segment that the company operates in is called Deep Packet Inspection (DPI), which monitors content transmitted online. Allot's technology can monitor thousands of applications. It can identify content transmitted through routers, such as a status changes on Facebook, YouTube video clips, conversations on Skype, and regular email messages.

On the face of it, the Allot equipment that reached Iran does not necessarily mean that the company is involved in trade with an enemy and espionage. Over the years, there have been a few similar reports of other companies involving DPI technology. But Allot is passively involved in this situation, and conspiracy theorists might be able to find a direct link between specific US legislation and the "Bloomberg" report.

The share price should reflect the risk of the image

This is a long discussion that revolves around the issue of net neutrality. If this is violated, then access providers should be able to charge more for using applications that require wide bandwidth, such as watching a movie or video chats through the Internet. This is already taking place in Europe, which helped telephony giants like Vodafone plc (LSE; Nasdaq: VOD) become major Allot clients.

One of Allot's potential growth engines is possible net neutrality legislation in the US, despite the a broad coalition of opponents against it. They maintain that monitoring content through the use of this technology as requested by the customer, is an invasion of privacy, and contrary to the liberal spirit upon which the Internet was created in the 1960s.

And so, while allegations of Allot's indirect aid to the Ayatollah's regime in Iran caused investors in Allot to sell shares, causing a drop in share price of more than 5% the day after the report, charges with a much heavier potential weight, of alleged aid to greedy telecommunications giants, are not bothering these investors at all. On the contrary; they have only strengthened the share price, helping push Allot's rapid climb toward a market cap of $500 million.

Has the time come for Allot's shareholders to recognize the significance deriving from their investment? After all, a US human rights organization is liable to point to the company as an abettor to the invasion of privacy of Americans and demand investigations and punishments, accordingly. What will the shareholders do then?

In other words, anyone who is not deterred by the heated debate about possible invasion of privacy should not be surprised if they get burned by the accusations of harm caused to Internet users in the Middle East. In both cases, Allot's image could be questioned and damaged. In both case, the issue of Allot's image should included in the risk that the investors assume.

Allot's share price rose 1.7% by mid-afternoon on the TASE to NIS 61.50, after rising 3.6% on Nasdaq yesterday to $16.31, giving a market cap of $488 million.

Published by Globes [online], Israel business news - www.globes-online.com - on December 28, 2011

© Copyright of Globes Publisher Itonut (1983) Ltd. 2011

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