Sunspot, take a look at this
Forbes.com
Wall Street Sours On Linux
By David Einstein
Easy come, easy go. That's the story of Linux stocks, which were
Wall Street darlings last year but have been absolute poison ever
since.
The leading companies in the Linux space--Red Hat (Nasdaq:
RHAT - news) and VA Linux Systems (Nasdaq: LNUX - news)
have gone code blue, shedding billions of dollars in market value
and leaving investors wondering what hit them. VA Linux, which
traded at $320 a share following its IPO in December, went into a freefall almost immediately
and hit a low of $26.88 last week. That's below its IPO asking price of $30.
Larry Augustin, chief executive of VA Linux, which makes Linux-based computers, has seen
his personal wealth plummet from a post-IPO $2 billion to just over $200 million. That doesn't
even get you a table near the kitchen in Silicon Valley.
Meanwhile Red Hat, which sells shrink-wrapped versions of Linux but gets most of its sales
from services and support, has suffered a similar fate. Its stock, which rose to $151.50 in
December, four months after its IPO, has fallen steadily, hitting a low of $23 last week. Caldera
Systems (Nasdaq: CALD - news), a Red Hat-like software company that went public last
month, is trading below its $14 asking price. And a fourth company, Linuxcare, last week
pulled its IPO and announced that its CEO was going bye-bye.
Like many dot-com companies, Linux providers seem to be plummeting to Earth after
enjoying a giddy ride based on unrealistic valuations. ``These companies were bid up in a kind
of pyramid scheme,' says Rob Enderle of Giga Information Group. By that he means that the
more people there were to invest in them, the more people wanted to invest. ``It was like
gambling,' he says. `` They didn't really understand the fundamental nature of the
companies.'
And the free fall may not be over. Because most Linux companies are really service companies
(the actual Linux software is available for free), Enderle figures that they don't have an
enormous upside revenue potential. ``The stocks could come down even more,' he says.
After Red Hat's stunning IPO last August when it went from $14 to $60 in a month, each
succeeding newcomer to the market benefited from the momentum of the previous one. Linux
was getting hyped to the gills as big computer makers like IBM (NYSE: IBM - news), Dell
(Nasdaq: DELL - news) and Hewlitt-Packard (NYSE: HWP - news) lined up to announce
support for the system. By the time VA Linux went public, investors were in a frenzy to latch
onto the next big Linux opportunity.
But after VA Linux surged 700% on its first day of trading, investors had to step back and take
a second look. How, after all, can a company with $47 million in annual revenues and $34
million in annual losses be worth $9.5 billion (which, by the way, is more than the current
combined market value of American Airlines and United Airlines)?
At the same time, the hype surrounding Linux started to wear off. Once billed as a potential
Windows killer on the desktop, it began to look more and more like a niche technology suitable
for servers and possibly for handheld devices. By the end of 1999, the market had soured on
new Linux offerings and was starting to tear apart the stocks of established players.
One company whose fortunes mirrored the Linux craze was Corel (Nasdaq: CORL - news), the
Canadian maker of WordPerfect. After announcing a Linux-based strategy, its stock surged
from $5 a share to $45 last fall. But since early December, the shares have fallen back to
around $6. Maybe it's time for a new strategy. |
