Dec 07, 1999
OUTLOOK 2000: Novell
(12/7/99)
Novell shares appreciated sharply to nearly $32 this summer,
before settling back in recent months.
And at a recent $21.50, the shares still look quite attractive.
Simply put, Novell is a better company than it was at the end
of last year. Eric Schmidt has given the company direction and
has forced the company to become innovative, and thus more competitive. We think that these
efforts will begin to bear tangible fruit over the next 12 months.
The company has been active on the new product front. And though many assumed that the core
NetWare product was growing long in the tooth, sales grew 17% in 1999. An upgrade, version
5.1 over the next month should boost sales further.
We remain concerned with the way Novell's management team has failed to fully articulate the
company?s story to the Street. Companies such as Microsoft (NASDAQ:MSFT - news) and
Sun Microsystems (NASDAQ:SUNW - news) have succeeded on this front, and have been duly
rewarded. While Novell has established itself as a leader in the directory service market,
investors have been trying to guess what each product, or investment will equate to in terms of
revenue or earnings. In the company's defense, we think this is, to a degree, part of the ultimate
plan.
Novell has spent the last year setting up the infrastructure and developing the tools that it will need
to grow the company at an accelerated pace in the years ahead. Wall Street expects earnings to
grow 29% to $0.71 per share on average. Shares remain quite undervalued in relation to the
multiples that other technology stocks are receiving in the market these days.
Novell?s $895.4 million in cash and equivalents at year-end should help fund ongoing research
and development efforts to stay ahead of Microsoft (NASDAQ:MSFT - news) . Additionally,
Novell will likely make further investments as it has in companies like Red Hat (NASDAQ:RHAT
- news) to further its reputation as a play on the future of the Internet. In turn, these efforts are
just as likely as earnings to help Novell receive a multiple more in line with other, similar issues.
Some have voiced concern that receivables are up. But as we pointed out, much of this is related
to licensing agreements that are to be worked off in future quarters. In the first quarter receivables
will be drawn down and the attention will then likely shift to NetWare 5.1. Novell won the Best
of Comdex award earlier in the month for this product. This indicates to us that its reception will
be warm and that the release will be a prelude to what is shaping up to be a strong year.
Analyst: Glenn S. Curtis
Updated on 12/7/99 with NOVL trading at $21.31
Recommended 11/16/98 at $14.38
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