Contributed by: AXXel Knutson
EVP & Director, Institutional Equity Research
Platinum Equities, Inc.
November 8, 1999 - Linux...what it is and why I care.
Linux [pronounced with a short "i" like Lynn-ex] is probably more dangerous to the long-term outlook of Microsoft than the Justice Department.
It is an "open source" operating system that can be altered to meet the needs of the users and the basic "kernel" is, importantly, free and can compete directly with Microsoft Windows. Linux is far from perfect at this writing?in many tests Linux comes up slower in use than Microsoft, it is tricky to install and it is not as "user friendly" as Windows, but to concentrate on some of its short-term weaknesses is to be looking at the trees and missing the fact that Bubbles LaRue in all her magnificence is behind those trees [I could have used "?missing the forest", but Bubbles LaRue is a hell of a lot better looking than any damn forest] and users may spend a significant amount of time trying to integrate various components such as security and access under Linux.
The Justice Department Could be Linux' Best Friend
Microsoft's Windows NT (soon to be called Windows 2000) when run on low cost PCs. Costs about $1,100 for a 10-user license?Linux is free and MSFT might find itself under pressure from this operating system in time. Assuming MSFT does not embrace it, as I would suggest to Bill. Add to that the vagaries of the Justice Department's very successful prosecution of MSFT as an anti-competitive entity and we have the potential for a mix that could very well favor Linux in ways that we can only guess at this writing.
One could argue that Linux is just a poor man's UNIX system without all the bell and buckets [I hate whistles] but with the complexity of UNIX. At this point?that would be accurate.
It's not a free ride for Linux...yet.
Open source is therefore a type of software that includes Linux, which is a specific UNIX-compatible kernel. Included also is Apache server software, the Perl scripting language and others. . Programmers are drawn to this software because it gives them rights they could not obtain from Microsoft, rights such as the right to copy the program, the right to re-distribute those copies, the ability to improve and change the program and the right to view code that is created by others.
The strength is Linux is in its flexibility and that flexibility is at the user and developer level?therein lays the difference!
HOW IT BEGAN?THE ROOTS
Linus Torvalds began developing Linux in 1991, while he was a student at the University of Helsinki. Instead of drinking and chasing reindeer, like most Helsinkians, and making obtuse comments such as "Yah, sure, I'm not as stupid as I look." [I can say that, my grandparents are from Norway?a totally ignored people?not even good Norwegian jokes], but I digress, Torvalds wanted to write a new version of UNIX, so he and a group of programmers combined talents and created a core operating system called Linux. In 1984, Richard Stallman, a researcher at the MIT AI Lab, started a project "GNU" to compete with the trend toward proprietary, fee-based software. Why Richard wanted to do this is unknown to me and now that I think about it, I really don't care why. His belief that making source code available to anyone who wants it is integral to furthering computer science and innovation. How nice. So the kernel for the "kernel" has roots at MIT. Linux is a registered trademark of Linus Torvalds. Linux is developed under the GNU General Public License and its source code is freely available to everyone. Linux and its assorted distributions are free -- companies and developers may charge money for it as long as the source code remains available.
SOME OF THE PLAYERS
Companies such as RED Hat think that the ability of the customer to install and configure and use open source software gives real power to the end-user and if RED Hat is capable of embracing the basic architecture, then the packages that they develop for the end-user will result in demand. That surely appears to be the case.
Companies that are players in the field are RED Hat, Inc [RHAT-85.94], Cobalt Networks [COBT-128.12 IPO Friday with a high of $158], Corel Corp. [CORL6.81], Applix, Inc. [APLX-12] who markets a decision support family of products including an open suite of desktop productivity software and development tools for accessing, analyzing and communicating information in real time on various LINUX, UNIX and Windows platforms, Esoft, Inc. [ESFT-4.81], SuSe [German], Unify Corp [UFNY-30.12], Imprise Corp [INPR-4.81], Ariel Corp. [ADSP-2.75] Silicon Graphics [SGI-7.31] Caldera Systems [FLDF-6], VA Linux [private], Penguin Computing [private] and many of the Nasdaq 100 companies. But the short-term bottom line importance to these companies remains minimal.
Cobalt Networks [Internet or Intranet "in a box"] outshined the introduction of the common stock of RED Hat on Friday so that give you some indication of the attention that Linux is receiving. The initial public offering price for the 5,000,000 shares being offered by Cobalt is $22.00 per share. The offering was managed by Goldman, Sachs & Co., Merrill Lynch & Co., Robertson Stephens and SoundView Technology Group. We agree with the rationality of that attention. According to the company, Cobalt Networks, Inc. is a developer of server appliances that enable organizations to establish an online presence easily, cost effectively, and reliably. Cobalt's product lines-the Cobalt Qube, Cobalt Cache, Cobalt RaQ, and Cobalt NASRaQ-are used as Internet and Web hosting server appliances at businesses, Internet Service Providers, and educational institutions.
Cobalt, utilizes a version of Red Hat for its Linux software, for which it pays a license fee. Cobalt customizes the Red Hat version by eliminating portions of general-purpose source code it deems unnecessary for a dedicated server appliance, and then customizes the source code to perform with its hardware.
Cobalt posted a loss of $13.7 million on sales of $13.8 million. That dollar for dollar equivalent in sales but consider last year when Cobalt posted losses of $6.6 million on sales of $1.5 million." Don't expect earnings soon?expect volatility in the stock price.
Here is an interesting comment from a user ["adjustman"] who posted the following intuitive comment in the public domain at Clearstation.com.
"VA Linux is strictly an Intel shop, with all their new pieces being Pentium-III based. They also use an Intel motherboard (L440GX+). They have a new model, the FullOn 2x2, which is a two-rack-unit system (about 4 inches high), which has much nicer styling than their earlier units, with five hot-swap SCSI drive bays. This is some pretty serious hardware, basing at $3608 (one CPU, IDE drives).
Cobalt's Raq2 is a 1U rackmount. It uses a low-power (in the electrical sense) embedded version of a MIPS CPU (a la SGI) and only draws 35W (probably a fifth to a tenth of a Pentium-III system). Interestingly, their new Raq3 uses a "Intel-compatible processor", so probably an AMD K6-3 or something. They still claim 35W, which I have trouble believing. They also claim 8000 web sites and 7 million hits a day on one machine, which I do believe. The Raq2 uses IDE drives, vs. SCSI for Raq3, so they are obviously trying to make the Raq3 a lot beefier to compete with VA Linux. A Raq2 is about $1800, not sure how much the Raq3 is (supposedly it's available, though). You can do a lot of setup, configuration, and such through the front panel on the Raq.
Which is better? VA Linux can definitely produce more high-powered servers than Cobalt presently has. They had a quad-Xeon machine a year ago, and the FullOn 2x2 can have two CPUs. It's more of a conventional server, in a sense. The RaQ are more of an integrated appliance-type server. I hadn't checked their product line in a few months, so the RaQ3 is a bit of a surprise to me. If you need hot-swap RAID, Cobalt doesn't seem to have it yet.
Another one to look for (they haven't announced an IPO as far as I know) is Penguin Computing. They are similar to VA Linux, and their stuff is as good or possibly better. I seem to remember they beat VA Linux to market with 2U systems with hot-swap RAID (not by much). They also have an eight-Xeon box that they OEM'd from NEC. Watch out for them on your IPO radar..."
With kudos to "adjustman."
REDHat reported that its revenues totaled $4.4 million in its second fiscal quarter, which ended on August31, 1999. This is a 95% increase over revenues of $2.3 million for the same period a year earlier. The Company had a net loss of $3.1 million, or $0.09 per share, in the second quarter of fiscal year 2000, compared with net income of $0.1 million, or $0.01 per share, in the second quarter of fiscal 1999. Had the Company's initial public offering been completed at June 1, 1999, the Company's weighted average common shares outstanding for the three months ended August 31, 1999 would have been 67,835,538, which would have resulted in a net loss per common share of $0.05 for such period.
From Corel Corporation
announced results for its third quarter ended August 31, 1999. Revenues for the third quarter of fiscal year 1999 were $71.3 million, compared to $71.1 million in the third quarter of fiscal 1998. Net profit for the quarter was $17.6 million or $0.26 per share fully diluted ($0.17 per share from operations plus $0.09 per share from a non-recurring item), compared to a net loss of $7.8 million or ($0.13) per share in the same period last year. The total earnings per share of $0.26 for the quarter is the highest ever reported in the company's history. Cash at the end of the quarter stood at $23.8 million. All figures are reported in US currency.
In August, Corel unveiled its distribution of its Linux operating system, Corel© LINUX©, to the public for the first time. Corel LINUX will be available by the end of 1999 and Corel expects to deliver its office suite for Linux in early 2000.
WHAT IT IS
ú OpenLinux 2.2 includes: the new Linux 2.2x kernel,KDE 1.1 Desktop (GUI) interface, Glibc 2.1 Library with backward support for libc 5 library-based applications, DHCP Client, PowerQuest Partitioning (Caldera Edition) and Boot Magic 4.0, Corel WordPerfect 8,Samba support, Caldera Open Administration System (COAS), NetWare Client including PAM (Pluggable Authentication Module), BRU backup and restore Utility, StarOffice 5.0 (word processor, spreadsheet, E-mail and presentation software), Netscape Communicator, DR-DOS 7.02, XFree86 3.3.3 ,Linux Source Code, Getting Started Guide and PocketDocà fingertip reference guide. OpenLinux 2.2 began shipping in April 1999.
OUR RECOMMENDATIONS:
RED Hat [RHAT-85.94]. Buy with the complete understanding that this stock can be very volatile. Given the level of trading speculation that went into it during August and September, we could easily build a case for the need to see that speculation spill its guts out on a break of $50. If that were to occur, our rating would go to "strong buy.' On a long-term basis, we believe that there is more risk in not owning RED Hat than in owning. Buy it and fasten your seat belts. Not appropriate for margin accounts and LOL's or LOM's ["Little Old Ladies" and "Little Old Men."
Cobalt [COBT-128.12] There is no easy way to buy this stock. Given the reaction of the market to this company it is likely that every trader from here to Gary, Indiana is getting ready to buy this stock on a pullback. Although, we hope that happens, we would like to own this stock in size, it is our "guess" that the conventional wisdom of "waiting" for the pullback may not materialize.
So here it is: "Buy." And a "Strong Buy" on any break of $80. But you can see by the range, we do expect violence.
Ariel Corp [ADSP-2.75] Strong Buy. The consolidation of the move off the long-term base of $2-3 has been fully consolidated. The high in August was about $7.56. We expect a test of that number and we guess that it will be successful.
Inprise Corp [INPR-4.81] exploded on Friday, perhaps in response to the Cobalt reception in the market. It hit a high of $6.00 and a low for the day at $4.38. In effect, it gave up nearly 100% of the move. We rate a "Strong Buy."
Unify [UNFY-30.12] with a base at the $14 level, we are not exactly early on this stock. In September it moved from the base to $26. A minor sideways move and now this move to just over $30. Very good things are happening at UNFY and we will rate this a "buy."
Esoft, Inc. [ESFT-4.81] a similar kind of move to INPR, above, bounding off the $4.00 level but this did not go quite as far but it did stick. We rate this a "Strong Buy" and guess that it may have one minor move just under $4.50 where we would be quite active.
Applix, Inc. [APLX-12] at the end of August, APLX moved from the base of about $8-10 to $24.68]. We believe that move i9s consolidated and we recommend purchase?rating" "Strong Buy."
Corel Corp [CORL-6.81] is not a pure play but it does have a wide range of products that lend stability. We rate CORL as a "Buy." It has a stable base at the $5.00 level with spikes to the $10 range.
We are not going into detail on these companies at this time. We prefer to take them one at a time and will be following up. Clients of Platinum Equities, Inc., will, of course, have access to the reports. Others will likely see most of the reports but perhaps not all and we alert you to that fact.
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Article contributed by AXXel Knutson vtarmail@aol.com, EVP & Director, Institutional Equity Research, |
