So what: The mobile security researcher's shares started climbing on July 1, when Cisco Systems acquired industry peer OpenDNS in a $635 million deal, opening the door to speculation that VirnetX might fetch a similar buyout valuation some sunny day. Later, the U.S. Patent and Trademark Office approved two new VirnetX patents, regarding the finer points of encrypted communications and secure domain names. These patent grants gave VirnetX shares a large two-day boost around July 10, followed by a final minor surge at the tail end of the month, as the Patent Office issued another couple of patent grants. All told, the company now sports 47 approved patents (although some of these claims have been successfully challenged in court).
Now what: This is the 18th time in five years that VirnetX shares have surged at least 10% higher in a single month. That list of big wins includes such hits as the lawsuit-filing storm versus Cisco and others in August and September 2010, which doubled VirnetX's share prices in 31 days, the 69% gain in March 2011 thanks to a rash of bullish but speculative articles on the stock as a great 4G technology play, and the 40% surge of February, 2015, powered by courts moving those patent cases filed in 2010 one step forward.
On the other hand, the stock has also fallen at least 10% on 15 occasions during the same five-year period. In August and September of 2011, VirnetX faced two consecutive drops of 30% or more, resulting in a 55% two-month slide. That's where the cash proceeds from one big court win stopped appearing on VirnetX's income statements, reminding investors how temporary those gains can be. It only took one month to lose 45% in March of 2013, when VirnetX lost one of its largest and most important patent infringement cases. And who can forget the 61% plunge from last September, as a Court of Appeals decision erased an $368 million damage award?
Whether you're bullish or bearish on this patent wrangler, there's no denying that the stock is tremendously volatile. A thinly traded micro cap with 16% of shares held by insiders (including 12% by CEO Kendall Larsen), the stock is easily manipulated or tossed around like a dry leaf in the wind on the merest hint of relevant business news -- good or bad.
Some of these massive gains and plunges came in a single day, and you'll see many more pops and drops in the future. Personally, I believe that VirnetX's very business model has no place in a modern business world with a fully functional patent system, but that's not necessarily the world we actually live in. So I could be right, in which case VirnetX is worth absolutely nothing in the long run. I could also be wrong, and current shareholders could see their penny stock rise to billion-dollar valuations and more.
Either way, it's a tremendously risky stock for both bulls and bears.
My advice: Neither a borrower nor a lender be. Stay on the sidelines regarding VirnetX.
Anders Bylund has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. 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.