CALD is scheduled for next week and Red Herring has it classified as "Red Hot." Red Herring also has a contrarian view of the offering:
redherring.com
IPO Critic: Will Caldera collapse the Linux volcano?
By Tom Davey
Redherring.com, March 10, 2000
Next week, Wall Street crapshooters will decide how much hot air is left in the Linux balloon. Caldera Systems (proposed Nasdaq symbol: CALD), a vendor of the Linux operating system whose products are used mainly on Web servers, plans to sell about $40 million's worth of stock to the public around March 17.
The initial public offering (IPO), underwritten by Robertson Stephens, is expected to be priced at about $8 a share. It is currently getting a Red Hot reading on our IPO calendar.
If the initial public offering of 5 million shares follows the same trajectory as other Linux offerings, watch out. Four other vendors that peddle hardware, software, and services built around the so-called open source code -- Red Hat (Nasdaq: RHAT), Cobalt Networks (Nasdaq: COBT), VA Linux Systems (Nasdaq: LNUX), and Andover.net (Nasdaq: ANDN)-- went public late last year. Their debuts were set against a backdrop of euphoria that Linux was about to turn the tables of the computing world and bury Microsoft (Nasdaq: MSFT).
So far, at least, that hasn't happened. Despite its entanglements with federal regulators, Microsoft is still above ground in Redmond, Washington. Even though Bill Gates has stepped down from the CEO role, the company he founded is still making plenty of money, and its operating system and programs are on more computers than anyone else's. Microsoft's growth has slowed a bit, but it would be presumptuous to credit much of this stagnation to Linux.
All four of the recently public Linux contenders have meager revenues and large losses. Some are growing rapidly on a percentage basis, but not nearly fast enough to justify their post-market highs on Nasdaq.
STEEP RISE, DEEP FALL
VA Linux Systems, which sells Linux servers, experienced the biggest first-day rise in IPO history, jumping in December from $30 to $320 a share. VA has now returned to earth and is trading at around $111. But VA's current valuation of about 100 times annual revenues is still steep for a hardware company that lost $11.6 million in its recent quarter. By comparison, Dell Computer (Nasdaq: DELL), the fastest-growing PC hardware vendor in history, trades at about five times revenues.
Cobalt Networks (Nasdaq: COBT), a maker of Linux "server appliances" that make it easier to upgrade networks of servers, scorched to a high of $172 after its November offering. Cobalt lost $8.6 million on $9 million revenues in its recent quarter. The stock is now languishing at a slightly more realistic $87, or around 75 times sales.
Red Hat, a vendor of shrink-wrapped Linux software for consumers, went public in August. It rocketed to a split-adjusted high of $151 -- $302, presplit -- in December. By February, Red Hat needed more money and had a follow-on offering of 4 million shares at $95 a share, raising another $380 million. That flood of new shares combined with another 1.2 million shares registered by company insiders sent the availability of the stock surging past demand. Now, despite a frothy market, this freshly diluted equity trades at around $68.
Software companies generally trade at much higher sales multiples than hardware companies because they have higher gross profit margins. But Red Hat takes this to an extreme. Despite the downslide, it is still trading at nearly 300 times revenues -- not bad for a company that lost $3.6 million on a mere $5.4 million sales in its recent quarter. Meanwhile, Microsoft, which had $2.3 billion earnings in its recent quarter, trades at a paltry 23 times revenues.
Andover.net, a "community" site for Linux developers to share their code and ideas, went public in December and shot to a high of $90. In its recent quarter, the company lost $15.7 million on $2.1 million revenues. The stock now appears to be stabilizing in the $40 range.
RED HOT
Caldera's current Red Hot rating is probably due to the persistent buzz surrounding anything to do with Linux. But you can count on this stock being another one-day wonder.
Despite their struggles, the other four publicly-held Linux vendors have a big leg up on Caldera. Although the company has been operating since 1994, sales have been pathetically sluggish. Caldera lost $5.5 million in its recent quarter on sales of $553,000, which are up 3 percent from the period a year ago. What's even worse are gross profit margins of less than 1 percent.
To its credit, Caldera changed its business model last year to focus on the use of Linux in e-commerce, a fast-growing market. But this may be too little, too late. Caldera will face stiff competition in the United States from Red Hat, which has a big head start and better brand recognition.
Turbolinux, another Linux vendor that should go public later this year, already has a foothold in foreign markets and is dominant in Linux software that "clusters" many servers together for higher performance.
NOVELL REACH
Raymond Noorda, former CEO of Novell (Nasdaq: NOVL), founded Caldera. Novell, a computer networking company, has been on the wane since 1993, a year before he left the company.
Mr. Noorda owns 27.9 million shares of Caldera, which should be worth around $232 million at the time of the offering -- and probably much more later that day. Mr. Noorda's 73 percent post-public stake will allow him to elect all of the directors. But if he's smart, Mr. Noorda will begin dumping shares as soon as it's legal to do so.
The geologic term caldera refers to a crater caused by the collapse of a volcanic cone. After the hype around the Linux eruption clears, you may want to be on the sidelines if and when Caldera's stock craters. |
