from Barron's;
VA Linux Has a Great Product and a Crazy Share Price; It's Time to Get Excited Again About Excite@Home
By Bill Alpert
Linux software has captured Wall Street's imagination and is holding it hostage. Investors eagerly paid a ransom on Thursday, when VA Linux stock surged a record 698% after its initial public offering at $30 a share. The first-day close of $239 a share indicated that the tiny, unprofitable company was worth nearly $10 billion.
VA Linux's stunning debut, coupled with the $18 billion market value that's been placed on Red Hat, the leading vendor of Linux software, suggests to me that the Linux software phenomenon has captured not just imagination, but reason. If Linux creator Linus Torvalds were from Sweden instead of Finland, we might suspect a case of Stockholm Syndrome, which caused hostages to fall in love with their captors.
Free at Last
Make no mistake, Linux operating software, being free for the taking, is a wonderful thing for Internet consumers and anyone who's chafed at the hegemony of Microsoft's Windows operating system. In the holiday spirit, investment bankers are singing carols to Linux business models, even though in many a Christmas past the idea of a company handing out its products gratis would have drawn only their scorn.
What does yonder stock analyst say? The more Linux software that Red Hat gives away, the more consulting business they will do. And what is all that consulting business worth? For one measure, we can look to Scient, a hot e-commerce consultant whose stock trades at around $95 a share, or 50 times annualized sales. Clearly, that's a generous valuation, even for a fast-growing 'Net business. Yet Red Hat's shares are being valued far more generously. At a recent $273 a share, Red Hat shares trade for 1,100 times the annual sales implied by the company's latest quarterly performance.
When Barron's editors see valuations like these, they are likely to ask if "sales" is a typo, and should be "earnings." But the VA Linux and Red Hat businesses don't have any earnings at all. Of course, savvy investors value fast-growing firms on future results. Still, Linux investors seem to be peering particularly far ahead, to some Christmas Future, when Linux earnings will be jolly big.
While Linux products are wonderful values, the stocks right now are not.
later,
InSook Prasad |
