Another week, another bubble.
Dow Jones Online News, Wednesday, September 01, 1999 at 00:14
(Published on Tuesday, August 31, 1999 at 21:12)
By Susan Pulliam, Staff Reporter of The Wall Street Journal
This week's feeding frenzy among Internet day traders has developed
around stocks associated with Linux, the computer operating system that
was developed by computer hackers and which many technology experts
believe could eventually pose a challenge to Microsoft's Windows.
Tuesday, some of the air was let out of the bubble, with nearly all
of the Linux stocks -- including Applix, Corel and Ariel -- giving back
some of their gains from the run-up, which began on Friday and
accelerated on Monday. Applix, which stood at around 8 before its recent
run-up, closed at 14 11/16, down 3 15/16, or 21%. Corel, which traded at
around 4 last week, closed at 5 3/4, down 5/8, or 9.8%. And Ariel, which
was at about 2 before its big rise, closed at 4 7/16, down 2 1/8, or
32%. Applix and Corel had finished Monday among the day's top-10
winners, with gains of 12.8% and 13.3%, respectively.
The run-up in Linux stocks provides the latest example of the
powerful explosion that can happen in a group of stocks when Internet
chat rooms embrace an idea. It also, undoubtedly, has left some
investors wondering what hit them. Almost as abruptly as they began
talking up Linux stocks, Internet chat rooms dropped the stocks like a
hot potato. That has left some day traders -- those investors who
rapidly hop in and out of stocks, sometimes within minutes -- wondering
whether the stocks are headed back to their prefrenzy levels.
There may be an argument that the party isn't over. Remember, for
instance, what happened when Internet investors leapt into shares of
Siebert Financial and JB Oxford following a big run-up in the first tier
online brokers, such as Ameritrade and E*Trade? Both Siebert and JB
Oxford gave back much of their gains following stratospheric jumps in
early February and mid-April. But JB Oxford, which was a penny stock
before the dot-com crowd discovered it, is still trading at a relatively
lofty level of over 8. Siebert closed Tuesday at 17 5/8, way above its
low for the year of 5 3/4.
But the life cycle of the minibubbles that seem to be emerging with
growing frequency in Internet stocks appears to be shortening, as
Internet investors search for new ways to achieve the great gains they
enjoyed earlier in the year. "These ideas are like footballs," says
Merrill Lynch Internet analyst Henry Blodget. "They get thrown around
for a few days in the chat room and then they get thrown to the side of
the field, and they go find another one," he says.
The Linux craze first took root on Friday, when Internet investors
discovered similarities between Applix and the hot newly public Red Hat,
both of which provide Linux software and support. Red Hat has been on a
tear since its initial public offering, skyrocketing from its offering
price of 14 to a close Tuesday at 82 5/16, up 6 3/4 or 8.9%. Why, then,
Internet investors reasoned, shouldn't Applix deserve an extra dollop of
market value, too - say, $140 million compared with its prefrenzy
starting point above $80 million?
Even some day traders themselves recognize the weakness in the
thinking behind the trend. "For Red Hat to be worth $6 billion is
foolish," says Mayer Offman, head trader at day-trading firm Generic
Trading in New York. "Maybe Red Hat is worth only $200 million. But
everyone extrapolates the other way. Momentum traders love seeing these
kinds of stocks."
The frenzy didn't stop with Applix, however. On Monday, it swept up
such forgotten stocks as Corel, Ariel, Unify and Enlighten Software.
Shares of Inprise also ignited on Monday from the rush to find Linux
plays.
The moves were extraordinary. Ariel, which has a strategic alliance
with Red Hat, rose 200%, or 4 3/8, to 6 9/16, while Corel, which is
providing software that runs on Linux, jumped from a low of 4 7/16 on
Friday to a close of 6 3/8 on Monday, a 44% increase.
To understand why, take a look at a small sample of some of the
messages posted on just one of the big chat rooms that was pushing Linux
stocks:
13:48
Cheetah: CORL . . . expect major coverage . . . bulletin boards,
print and tv media tonight and in morning papers tommorow . . . why?
Hottest Linux play . . . 10 million served and up big today in tough
market.
15:18
scottnmd: APLX liftoff
15:33
aaa: APLX Babooooom
15:41
PV: ADSP there she goes
15:49
zipp: ADSP & CORL great buys for tomorrow
Those kinds of comments were being posted, rapid fire, all day long
on dozens of chat rooms. Says Mr. Offman, who made both bullish and
bearish bets on the stocks Tuesday, "People were just going after
everything."
There is just one catch, however. Most of the companies whose shares
are now being billed as Linux plays are small, little-known technology
stocks for a reason, say investors. In some cases, they are companies
that had limited success in other software businesses. And now they are
trying to reinvent themselves as Linux companies, say some investors.
Corel is an office-automation company that bought Wordperfect but had
been having limited success convincing investors of its merits. And,
until this week, investors also weren't buying Ariel's wireless-network
story. Corel and Ariel officials couldn't be reached for comment.
In most cases, there is, at least, a real Linux connection. Santa
Cruz, which supplies Unix server software, has said it will provide
technical support for Linux. And Inprise provides customers with Web
browser applications that can run on Linux.
But it is far from clear that these companies have the kind of
business that can sustain the stocks at this level. No question, Linux
is catching on out there, particularly in the server market, where it
gained a 15.8% share of the market for new units of software sold last
year. In the client market, representing desktop and personal computers,
for instance, Linux gained 2.1% of the market measured the same way.
"In either case," however, says Dan Kuznetzky, a program director
with market-research company International Data, "it's not a commercial
platform," meaning Linux can be downloaded for no charge off the
Internet.
What some of the Linux companies are doing, by repackaging Linux and
offering services or software along with it, is a little like selling
bleach, says Mr. Kuznetzky. Some people add perfume, others go for fancy
packaging. Some even add a thickener, so it won't splash so easily. "The
advantage comes from brand management, and the people who can manage a
brand well can convince people their brand is better."
Before buying these stocks, says Mr. Kuznetzky, it would be
worthwhile asking yourself whether they have been successful companies
so far. "Have they proven themselves to have a good grasp of what
customers want and a good distribution method?" If the answer is no, it
may be worth sitting out the ride, he says, no matter how much fun it
looks.
Copyright (c) 1999 Dow Jones & Company, Inc.
|
