Can Sandvine help Save the Internet?

When Sandvine President and CEO Dave Caputo picks up a newspaper these days it must be hard to stop smiling. Two contentious, consumer-related technology issues keep landing on editorial pages, and his company is in the sweet spot for both.

The first has to do with what the FCC calls “Bill Shock”. It’s estimated that thirty million Americans have experienced a bill more than $50 larger than what they anticipated, but were not alerted to beforehand. Under new rules the FCC is proposing, consumers would have access to simple alerts and easy to find tools to manage their accounts better. It would also “…require wireless phone companies to obtain customer consent before charging for services that are not covered by their regular monthly service plan.”

Northern Securities analyst Sameet Kanada believes these measures are good news for Sandvine, because tools the Waterloo based company has been building for years address these very issues.

The other issue can be described with a host of technical terms like buffer overflow, stateful packet inspection or deep-packet inspection. Or it could be described with just one: Netflix. The growth of Netflix is bringing debate about bandwidth management to a head. The issue? Netflix uses a ton of bandwidth, and that supply is not unlimited. And since Netflix has transitioned from a mail order business model to a primarily online one, it has had a staggering impact on bandwidth usage. One report estimates that Netflix now accounts for twenty per cent of peak bandwidth use.

Different legislative jurisdictions are dealing with the issue differently. To try and manage congestion for Canadians, the CRTC approved usage based billing in May of this past year. But these types of issues are going on worldwide, and Internet service providers are scrambling for ways to advance their technologies. As tech journalist Farhad Manjoo pointed out recently” American broadband is pretty crummy. Unlike in other countries, our Internet plans haven’t been getting faster, cheaper, and more widespread” Manjoo wonders: “If 2 percent of Netflix customers account for one-fifth of the traffic on North American broadband lines, what will happen when more and more Netflixers begin to watch movies during peak times?”

Many investors believe Sandvine may be able to help US service providers avoid the worst scenarios, or at least curtail the problem until more capacity becomes available. Sandvine sells technology that gives service providers a window into the world of their chaotic traffic. The buzz-phrase in this space is “deep packet inspection”, a technology that enables wireline and wireless networks to target data-overload issues. Sandvine’s growth is clearly part of a larger trend; Infonetics Research estimates that deep packet inspection will grow from just over $200 million in 2008 to a more than $1.5 billion business by 2013.”

Sandvine has been signing service providers left and right, with five new contracts announced yesterday. The stock has responded, closing at a fifty two week high of $2.82 on December 6th. The recent valuation hike has sent analysts scrambling to reassess Sandvine’s risk/reward scenario.

Last week, Canaccord analysts Eyal Ofir, Paul Mansky and Shawn Rassouli mantained their buy rating on Sandvine, noting that the December 21st FCC Net Neutraility vote could be a catalyst for the deep packet inspection market in the United States. More recently, Kris Thompson of National Bank Financial said the recent major rally means the company’s valuation is too rich and that shareholders are “pricing in perfection”. Thompson maintained his $2 target for the stock.