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Strategies & Market Trends : Market Gems:Stocks w/Strong Earnings and High Tech. Rank -- Ignore unavailable to you. Want to Upgrade?

To: nokomis who wrote (112551)	8/26/2000 1:16:14 AM
From: puborectalis	Respond to of 120523

VA Linux surges, Gnutella hardly invulnerable By Sam Williams August 25, 2000 Linux hardware vendor VA Linux (LNUX) took a sizable step out of the Wall Street doghouse Wednesday when it released its fiscal fourth-quarter earnings. Analysts were optimistic about the integration of Andover.Net's media properties into VA Linux midway through the quarter, and the Santa Clara, Calif.-based company managed to beat consensus expectations. VA Linux posted an operating loss of 10 cents a share compared with the First Call estimate of 15 cents a share. In the same period last year, the company posted a loss of 34 cents a share. Revenues rose to $50.7 million from $7.84 million a year ago. -------------------------------------------------------------------------------- VA Linux is ... differentiating itself from competitors such as Dell. -------------------------------------------------------------------------------- Such a performance prompted analyst firms such as Chase H&Q and Credit Suisse First Boston to reiterate their "buy" ratings on VA Linux. Still, for those following the company, it was the sequential growth in gross margins -- revenues minus cost of sales -- that was most impressive. For the quarter, VA Linux posted 22 percent gross margins compared with 18 percent for the previous quarter. "Gross margins are a sign of industry leadership; it's a sign of how much extra customers are willing to pay to have a product with your name on it," says Prakesh Patel, an analyst with W.R. Hambrecht who upgraded the company to "strong buy" before Wednesday's announcement. "The fact that they've been able to grow their gross margins shows the progress VA is making to differentiate itself from competitors such as Dell (DELL)." Although it's hard to forget the company's now-legendary fall from its first-day high of $320 a share, analysts such as ABN Amro's Keith Bachman warned investors not to dwell on old numbers. "Were the December valuations overpriced? Of course," says Bachman, pointing not only to VA Linux but other leading Linux companies, such as Red Hat (RHAT) and Cobalt Networks (COBT). "Now that the prices are more in line with reality, the stocks have stabilized. They're in an area where their own successes and failures will dictate their valuations." In many ways, Bachman points out, the factors that contributed to VA Linux's stellar opening are the same factors that contributed to the company's spring-summer slide. In December, when VA Linux arrived on the market, it offered the perfect trifecta for the trend-savvy tech investor: A Linux company, a dotcom and a business-to-business vendor all rolled up into one. In the following months, as each of those market groups fell out of favor, the company's market value has suffered accordingly. While VA Linux may reek of unbounded upside potential like it once did, Bachman sees the recent uptick as a sign that the company is forging its own identity in the mind of investors. "I think the results gave investors a heightened level of confidence," he said. "Investors are seeing a real business now with a rapid growth rate." As for the coming quarter, W.R. Hambrecht's Patel sees more good news. The company's close ties with Intel (INTC) should pay off as Intel rolls out its next generation 64-bit processor, Itanium. Also, Linus Torvalds and the other kernel team members are expected to deliver a new kernel this fall. "Combine the new higher performance hardware with a higher performance kernel and you have a system that could potentially rival Sun (SUNW)," says Patel, whose current price target for VA Linux is $60, about 25 percent above today's market close. "The company is predicting to break even by end of 2001. I think they can do even better than that if they keep blowing away estimates like this."