Complete Alex Brown Upgrade Report on LNUX
by: OlderbutWiser2
8/9/00 7:23 pm
Msg: 15621 of 15627
HIGHLIGHTS:
* Several potentially positive catalysts lie ahead for VA Linux -- we
believe that this is an appropriate time for investors to reconsider the
investment story behind what we consider to be the best positioned Open
Source player
* LinuxWorld will be held next week -- we believe VA Linux is likely to
unveil new initiatives and strategies to solidify its market leadership in
the Open Source space. We expect news from the show to rekindle investor
interest in the segment
* Demand for the company's server products continues to be strong -- we
expect this to drive strong performance during F4Q00 in particular. Our
estimates are for $44.6M in revenues, up 470% Y/Y and operating EPS of
($0.15), with potential upside on top line
* Expanding into new market opportunities -- Expect VA to leverage its
current server expertise into the rapidly growing market for NAS storage
appliances. Longer term, we expect the company's web properties to help it
deliver more specialized infrastructure servers (e.g. application,
database
servers ...)
* We are comfortable with our recently raised FY01 estimates of $246M
revenues (up 116% Y/Y) with operating EPS of ($0.26), above the current
Street estimate of ($0.37). Upgrading stock rating to STRONG BUY from BUY,
with new price target of $70 based on 10x FY01 revenues.......
Over the next few months, we believe that several positive catalysts are
in
store for the Open Source community and VA Linux in particular. We expect
the release of the enhanced Linux kernel 2.4, which is expected before the
end of CY00, to be key among those catalysts, driving renewed demand for
Open Source solutions. As such, we believe that this is an appropriate
time
for investors to reconsider the VA Linux investment thesis.
This thesis revolves around the following three key catalysts:
* LinuxWorld will be held next week (Aug. 15 - 17) in San Jose - This
will be the largest pure Linux event of CY00 and we expect it to generate
significant "press releases" from Open Source and established players
(Michael Dell is a keynote speaker). More specifically, we expect that VA
Linux will take advantage of this event to unveil new initiatives and
strategies to solidify its market leadership in the Open Source space.
These
initiatives, we believe, would be aimed at boosting the company's image
with
the Open Source community, winning it support from key contributors to
various Open Source projects. In addition, these would boost the company's
expertise-level in Open Source solutions, enabling it to differentiate
itself from established and Open Source competitors.
* Demand for the company's products continues to be strong - In the
short term, demand for VA Linux' products from such customers such as
Akamai, NetLedger and other service providers continue to accelerate.
Today,
VA is uniquely positioned, in our opinion, to deliver on the highly
specialized needs of these customers, by leveraging Open Source
technologies
and its hardware expertise. We expect strong end-user demand to drive
strong
performance during this quarter in particular - we are currently
forecasting
$44.6M in revenues for F4Q00 (ending July '00), up 470% Y/Y. However,
given
the short-term catalysts we outlined, we would not be surprised to see the
company beat this estimate. Even without the potential upside, we expect
the
company to finish FY00 with at least $114M in revenues (up a strong 540%
Y/Y). Such revenue performance coupled with VA Linux' emergence as the #5
worldwide vendor of Linux server (just behind more established players
IBM,
CPQ...) in our opinion proves the validity of the company's business
model.
* Expanding into new market opportunities - In the long term, we
expect
VA to leverage its current success in Linux servers into the rapidly
growing
market for storage appliances. Specifically, we expect VA Linux to launch
new storage products based on its NetAttach acquisition. At first, we
expect
the storage products to be of the NAS variety. Linux (with its native NFS
support) and PC server technology lend themselves well for low-end NAS
solutions. In addition, we believe that the Andover.net acquisition will
start to pay off both in terms of branding for VA Linux and for driving
continued development in the Open Source community. In the long term, we
expect this to help expand the types of solutions that VA can sell into
(e.g. application servers, database servers...), significantly boosting
the
company's market opportunity......
In addition to these catalysts, we believe that VA Linux is currently
trading at a discount to both its peers among the next-generation platform
vendors and to other legacy platform vendors. As of the close on Aug. 8,
2000 LNUX is trading at 4.9x FY01E revenues compared to a range of 15x to
27x FY01E (consensus and DBAB estimates) revenues for the next-generation
platform vendors (Cobalt Networks - COBT, not rated, CacheFlow - CFLO,
not
rated, Network Appliance - NTAP, rating 1, $91). In the case of Sun Micro
(SUNW, rating 2, $111 7/8) and Dell (DELL, rating 2, $41), two more
established vendors, LNUX is trading at 4.9x FY01E revenues compared to a
range of 2.4x to 8.7x, even though LNUX is expected to continue to grow
significantly faster.
For F4Q00 (ended July '00), we are forecasting bullish results of $44.6M
in
revenues (up 470% Y/Y) and operating EPS of ($0.15) compared to ($0.34) in
the year prior. Based on the points discussed above, our long-term outlook
for the company is very bullish: we are forecasting strong FY01 results,
with revenues of $246M (up 116% Y/Y) and an operating EPS of ($0.26)
compared to ($0.74) for FY00. Continuing strong end user demand for Open
Source solutions combined with VA Linux' unique Linux expertise and
product
portfolio and the company's current attractive valuation lead us to
raising
our stock rating to STRONG BUY from BUY, with a new target price of $70
based on 10x FY01 revenues |
