Applix: The Linux Play
Briefing.com excerpts ...
When Red Hat Software (RHAT) filed to go public on June 4, the Linux software platform began to get media play. Most articles took the position that Linux would be Microsoft's (MSFT) biggest headache over the coming years. Frankly, we don't think Linux, even if it is successful, will have much measurable effect on Microsoft anytime soon. But if Linux does grow, there is a way to play the trend involving a company that is currently profitable, has a complete suite of Linux applications, and sells for a fairly low valuation, despite nearly doubling in the past month. It is a company called Applix (APLX).
The Linux Market
Linux is a version of Unix with a kernel developed by Linus Torvalds. The kernel is distributed without charge and Red Hat Software (RHAT) takes the Linux kernel and adds code to develop into their own productized version of Linux. So far, Red Hat has managed to develop a niche market for their product with just under $11 million in sales.
But Red Hat will be raising $96 million in the IPO, which would give Red Hat a market capitalization of $640 million, if the offering is the usual 15% of the company. This would give Red Hat a very lofty Price/Sales ratio of 58, at the IPO price.
The implication of such a high Price/Sales ratio is that Linux, in the value-added version that Red Hat sells, will grow at astronomical rates.
But what will Linux run on? Until one of the major Intel PC manufacturers begins pushing a Linux machine at the expense of existing Wintel (Windows-Intel) machines, Linux based multi-purpose PCs are not likely to be widely distributed. Briefing.com thinks it is more likely that Linux growth will come from specialized PCs and servers, perhaps ones customized for specific internet applications.
But if Linux based multi-purpose machines grow in usage, applications will be required. One of the leading vendors of Linux based applications is Applix.
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Briefing.com has never used or even seen any of the Applix products and we therefore cannot offer judgement on the quality or suitability of any of the individual products. If you have used any of the Applix comments, please send us your comments (email address below).
Applix Valuation
For a software company whose products are completely linked to emerging industry trends, Applix has fairly low relative valuations, even considering the doubling in price in the last month.
Applix (APLX)
TTM Revenue 50.507
TTM Earnings Per Share 0.14
Shares Outstanding 10.51
Float 8.80
Price 7/7/99 Close 9 7/8
Market Capitalization 103.8
Price/Sales 2.1
Price/Earnings 6.7
These are fairly low valuations for technology stocks, even non-growth software companies.
However, Applix hasn't shown any growth over the past three years, with revenues of $51.2 million in 1996, $48.5 million in 1997, and $50.1 million in 1998. Revenue in Q1 of 1999 was $12.946 million, a sequential decline from Q4 98 revenue of $13.264 million.
Briefing.com Analysis
Frankly, we aren't sure enough about the Linux market to believe it will be the David that challenges the Microsoft Goliath as an operating system platform.
The argument for how Linux will overturn Microsoft's dominant role usually goes like this:
1) Linux's open code will allow developers to write highly specialized and optimized applications for internet servers;
2) Linux will grow as an internet server platform;
3) Developers will stop developing Windows based client applications, rendering Windows upgrades unnecessary, or even disadvantageous;
4) Microsoft's cash flow, Windows on new PCs will start to fade.
The only flaw with this argument is that internet servers are very database dependent, with Microsoft SQL and active server pages technology still a very widely used technology. Anytime you see .ASP at the end of a URL, you are looking at an "active server page" on your browser, which means the server is Microsoft based.
But there are enough people who think that Linux will become a widely accepted platform that they are willing to give Red Hat stock a Price/Sales ratio of 60 or more. In effect, the market is stating that Linux will grow at phenomenal rates.
But at such a high valuation, Red Hat must grow at terrific rates for the investor to get a higher return.
Therefore, Briefing.com feels that Applix is a better risk/reward ratio Linux bet, if you believe that Linux will be a platform for multi-purpose PCs. After all, Applix has a ongoing $50 million business that is profitable, which is currently valued at just $100 million. If the Linux does boom, and Linux applications are in demand, at least an Applix investment isn't starting at incredible high valuations.
In general, however, the $99 shrink-wrap software business model is distinctly out-of-fashion, having had it's heyday in the late 1980's. But we like the fact that you can purchase the Applix products online, giving Applix essentially zero cost-of-goods-sold. The question is how many people actually buy Applixware online.
For the Applix Linux products to take off, Linux needs to grow, and Linux users must need Applix products. It may well turn out the Linux will succeed, but in the role of an invisible operating system on an "internet appliance" something that Microworkz is already doing. They sell a $199 (or free with ISP subscription) iToaster PC running a Linux variant instead of Windows - but Applixware does not run on the iToaster.
For the Applixware suite to be successful, Linux needs to become a platform for general purpose PCs. The trend towards free PCs as part of an ISP subscription may run against this requirement. If Linux becomes an operating system for web servers, Applix benefits only tangentially.
Of course, all of this is analysis of Applix's business prospects. For Applix share prices to increase, all it takes is for the buying public to begin to believe that Linux will boom, and Applix with it, as a better risk/reward Linux bet than Red Hat. That growth in the public's belief has already happened, as Applix stock has doubled in the past month, simply because Red Hat came into the investing public's eye.
Comments can be emailed to the author, Robert V. Green, at rvgreen@briefing.com.
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Best of luck. |
