Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Market Gems-Trading Strong Earnings Growth and Momentum -- Ignore unavailable to you. Want to Upgrade?

To: Bocor who wrote (5590)	3/1/2001 8:57:30 AM
From: ColtonGang	Respond to of 6445

LNUX postmortem.......Red Hat Pulls a Rabbit, VA Linux a Skunk By Warren Shiau (wshiau@stockhouse.com) Thursday, March 1 To say that Linux fever is off its peak is an understatement, but these stocks may be poised to reboot. A couple of once-hot Linux companies, Red Hat [RHAT] and VA Linux [LNUX] have what look like diverging futures. There's hope Red Hat could stage a long-term share price recovery, while VA Linux appears stuck in processing mode. In late 1999, Red Hat traded as high as $151-5/16 and VA Linux $320. A combination of lost momentum, a weak tech stock market, and falling enthusiasm for Linux has contributed to Red Hat closing Tuesday at $6-21/32. VA Linux hasn't fared any better; it closed at $4-31/32. The two companies have differing business approaches that make Red Hat's prospects appear better than VA Linux's. Linux is a fast growing operating system (OS) that has taken 25% of the low-end to mid-range Intel-based server OS market in just a few years. But the revenue generated from this market share is low. International Data Corp. forecasts the dollar value of the Linux OS market will still be under $100 million in 2004. The problem as far as revenues go is Linux's open-source nature. Open source code is freely available code and as such does not produce much in the way of sales dollars. Red Hat tries to address this by selling its own flavor of Linux. It enhances the basic open source code with additions like compilers, configuration tools and documentation -- all of which costs customers money. Red Hat also sells services, including developing specialized versions of Linux for various Internet device makers. Product support fees contribute to the revenues mix as well. VA Linux takes a hardware-based approach with its purpose-designed Linux servers. It tries to leverage its hardware sales by tacking on a sale for its version of the Linux OS and associated service/support packages. VA Linux was first to market with such an integrated Linux product offering. Its all-in-one sales package has proved popular with customers looking for a one-stop Linux shop. VA Linux has two big problems now: Significant portions of its business came from the dot-com market. A market that is in serious decline; Competition for VA Linux is increasing dramatically as big server vendors move into the Linux market. Sun Microsystems [SUNW] is wishy-washy on Linux, but Compaq [CPQ], Dell [DELL], Hewlett-Packard [HWP] and IBM [IBM] have all made commitments to it. In the long-term, VA Linux has no special advantages or prospects. In this company, VA Linux is just another server vendor. In the long-term, VA Linux has no special advantages or prospects. Its success against these larger competitors depends upon its hardware, service and support capability, and operating efficiency. The likelihood of VA Linux producing knockout hardware offerings is slim because the Linux market is currently in Intel-based servers. Whether it's from Compaq, Dell, Hewlett-Packard, IBM or VA Linux, it's hard to make one Intel-based server so superior to another that you whip the competition based on hardware alone. That makes pricing, service and support, and operating efficiency even more important now than in the past. Competing against Compaq, Dell, Hewlett-Packard and IBM in these areas is extremely difficult. When VA Linux maintained first mover advantage with its all-in-one Linux package, its share had a chance. Now that it has lost that advantage, it faces an uphill battle. Red Hat has more of a chance. Red Hat has more of a chance. Although its market share has declined from 52% to 48% of Linux server OS shipments in the past few months, 48% is still 48%. As long as the basic Linux kernel keeps improving, Linux should continue gaining server OS market share. Big vendors are investing heavily, pushing this improvement. IBM, for example is sinking a billion dollars into supporting the development of Linux variations such as Red Hat's. Its aim is to expand Linux's scope from low-to-mid-range servers, up into the high-end server market and down into the desktop and handheld markets. This is exactly what Red Hat needs -- expansion of the Linux market. Red Hat could end-up being better off having less market share, but in a larger Linux market. The key issue is growth, because the dollar value attached to every point of overall Linux OS market share is very low. As the dominant Linux OS vendor, Red Hat has a chance to maintain and build support from big hardware vendors like IBM. If Linux does go to the places some major hardware vendors are trying to push it, whether it is mainframes, servers, desktops, handhelds or a combination of all these, Red Hat has a good shot at sustained growth, profitability and some sort of share price recovery from the $6 area that it's fallen to. That's a better shot than VA Linux, at least.