LNUX...after basing since May,the momentum and psyche towards Linux stocks is evolving....
Tuesday August 15, 2000 (10:58 am ET)
A Second Look at Linux
With innovative programming, more receptive corporate customers,
and a new Intel chip, open-source stocks may be a bargain
By Sam Jaffe, Business Week Online Street Wise
NEW YORK, Aug. 15 (Business Week Online) - In February I cautioned
investors to be wary of the high stock prices of Linux-related companies Red
Hat Inc (RHAT) and VA Linux Systems (LNUX). Well, the slide in the
Nasdaq has taken care of that. Since February, the two companies are down
an average of 71%. The two other private companies I mentioned, TurboLinux
and LinuxCare, both delayed their planned initial public offerings as investor
enthusiasm for the sector dried up.
But now that Linux stocks are affordable again, it's time to reassess the Linux
market as a whole. To the uninitiated, Linux is a computer operating system
that competes with the various forms of Unix and Windows 2000 (the two most
commonly used operating systems). Unlike its competitors, Linux' underlying
source code is open for anyone to view it and make changes -- as long as
those changes are published and available to all. The software itself is free, in
monetary terms and in intellectual-property terms, although companies that
produce it can and do charge for technical support and services.
Linux was practically unknown for the first seven years of its life until the
media discovered it in 1998. Then it was hailed as the cure-all for every
computer woe. This hubbub has finally died down.
That's good news for those with money to invest. Even as the Linux stocks
reenter the atmosphere, prospects for the operating system are blasting off.
More than a third of all Web servers use Linux, according to
software-monitoring firm Netcraft. Every major computing company, with the
exception of Microsoft Corp (MSFT), has embraced Linux and launched
initiatives to provide Linux-related products. At the vanguard of the movement
is Intl Bus. Machines (IBM), which now produces servers, laptops, and
mainframes that run on Linux.
"Linux has arrived"
One of the last holdouts, Hewlett-Packard (HWP), announced on Aug. 14
that it had adopted Linux as a strategic operating system. "Linux has arrived,"
says Jim Bell, director of HP's Open Source and Linux Operations.
"Customers have been asking us to offer our products in the Linux
environment, and we've complied."
Even Raleigh-based Red Hat, long-derided for trying to make a business out of
a free software, has had a good six months. The company recently announced
that it has teamed with cell-phone maker Ericsson (ERICY) to design and
produce a new generation of wireless Internet devices that will run on Linux.
Indeed, much of Red Hat's focus has turned to the embedded market, those
small single-use devices that have Linux embedded onto their chips. Analysts
expect the company to lose 7 cents per share this fiscal year and earn 4
cents per share next year.
Meanwhile, TurboLinux and LinuxCare are both going full steam ahead,
despite the postponement of their IPOs. TurboLinux recently released a new
version of its software that is optimized for Oracle's (ORCL) 8i database
product, one of the most popular pieces of business software. LinuxCare has
teamed up with several hardware vendors, including Hewlett-Packard and Sun
Microsystems (SUNW) to provide certification systems and technical support.
Both companies have recently successfully completed new rounds of private
financing.
Soaring revenues
While most of the attention has been paid to using Linux for servers or for
smaller Internet devices, significant advances have been made on the desktop,
a region of computing currently monopolized by Microsoft. Although Linux has
made little headway in terms of market share, it has matured considerably as
a desktop alternative. Caldera Systems (CALD) and Corel Corp (CORL)
both have produced easy-to-install versions of Linux for those who wish to
install it themselves.
At the same time, a consortium of heavy hitters, including Sun, IBM, and
Compaq has joined with the GNOME Foundation -- the main cheerleader for a
new desktop interface that has won rave reviews. The consortium's plan is to
complete a new desktop interface for Linux, including an open-sourced suite of
office-productivity software, by the end of the year.
The most exciting news, though, comes from VA Linux. Although the
company's stock price has struggled the past six months, its revenue growth
hasn't slowed at all. In the company's fiscal fourth quarter, which ended in
July, sales increased 470% over 1999's fourth quarter. Based on 2001
estimates, the company sells at a price-to-revenue ratio of 4.9. Competitors
Sun Microsystems and Dell (DELL) have traded in the past year in a range as
high as 8.7 "even though LNUX is expected to grow continually faster," says
Deutsche Bank Alex. Brown analyst Phil Rueppel, who recently upgraded the
stock to a 'strong buy' recommendation.
VA Linux' core business of selling servers optimized for the Linux operating
system got a big boost when company programmers developed a new
build-to-order-software system (called BOSS). The Web-based service allows
customers to input their exact needs and then places only the necessary
software on each computer. The entire process is entirely automated. "This
extends Michael Dell's vision of build-to-order hardware into the realm of
software," says CEO Larry Augustin. "This is a truly revolutionary product, and
it gives us a huge competitive edge."
A new chip
Independent analysts agree with Augustin's enthusiastic assessment. The
reason why the new BOSS system will be popular is because
information-technology departments had previously spent hours loading
specialized software onto each new machine they bought, one of the biggest
time-wasters in every IT employee's workday. "This solves a huge problem,"
says Stacey Quandt, an analyst with the Giga Information Group. "It allows a
company to optimize its hardware with exactly the software they need."
George Weiss, an analyst with Gartner, goes even further. "As the program
develops, it will allow VA Linux to become a vendor of software, also.
Independent software vendors will pander to them to be listed on the system.
It's a very clever way of utilizing all the best things that free software and the
open-source community have to offer," says Weiss.
The big event that everyone in the Linux community is awaiting is the release
of the IA-64 chip by Intel, soon to be renamed the Itanium. That chip is the first
new-generation chip since the introduction of the Pentium in 1994. The new
chip promises enormously faster speeds and a giant leap in memory over even
the most advanced Pentium 4. As in every previous semiconductor cycle, the
entire computing industry will slow down and then ramp up again as the
Itanium hits the market.
The difference this time is that Microsoft isn't the only company to get
advanced plans of the new chip. Intel also has been sharing its blueprints with
most of the main Linux developers and has even taken an equity stake in
some of them. The first application of most Itanium computers will be as
servers, which is Linux' main competency. Augustin, VA Linux' CEO, points
out that Linux has a big head start in working on the Itanium because it has
already been tweaked to perform well on similar types of chips that are already
available, such as Sun's Sparc and Compaq's Alpha. Windows was never
designed to run on those chips.
The leap to Itanium, which is Intel's first 64-bit chip, will be a much more
natural one for Linux than it will be for Windows 2000, which was designed for
older versions of Intel's chips. "When the IA-64 comes out, the entire slate will
be wiped clean," says Augustin. "Linux will really shine in that environment."
There are plenty of roadblocks in the path of that vision becoming reality. Lots
of corporate buyers who don't like to try anything new still have to be
convinced of Linux' durability. And Microsoft is still in the early stages of its
launch of Windows 2000, which will only become a better competitor as time
goes by. But if Augustin is right, then his stock, along with other Linux stocks,
looks pretty cheap right now. |
