IPO Update: Cobalt Networks explodes up 482 percent

Cobalt Networks (Nasdaq: COBT) stormed up 106 1/8, or 482 percent, to 128 1/8 after opening at 139 in its initial public offering Friday. The stock surged as high as 158 at one point.

Cobalt, which makes server appliances that run Red Hat's (Nasdaq: RHAT) version of the Linux operating system, offered 5 million shares. The company upped its price range to $20 to $22 from $14 to $16 Thursday.

Investors were bullish on Cobalt's prospects given its ties to Linux and opportunity in the growing server appliance market. Dataquest predicts the server appliance market to grow from $2.2 billion in 1999 to $15.8 billion in 2003 with Linux-based servers representing 24 percent of that sum, or $3.8 billion, in 2003.

The company's server appliances are specifically designed to handle one or a few network-based applications such as e-mail or e-commerce well. Since Cobalt doesn't try to do too much with one box and runs on Linux, the company's products may be more stable.

"Our server appliances enable small- to medium-sized organizations that could not previously establish a presence on the Internet to do so easily, cost-effectively and reliably," the company said in regulatory filings.

The company reported revenue of $3.5 million for 1998 and $13.8 million for the nine months ended Oct. 1. Net losses were $10.5 million and $13.7 million for the same periods. Those results came mostly from sales of the company's Cobalt Qube and Cobalt RaQ products.

The biggest risk for Cobalt is a decline in average selling prices and competition from larger players. "We anticipate that as products in the server appliance market become more commoditized, the average unit price of our products may decrease in the future," the company said.

According to Cobalt's regulatory filings, the company sees Compaq (NYSE: CPQ), Dell Computer (Nasdaq: DELL), Hewlett-Packard (NYSE: HWP), IBM, Sun Microsystems (Nasdaq: SUNW) as future competition.

Cobalt, which has sold more than 17,000 server appliances, to about 1,300 customers through Oct 1. didn't list Gateway as a competitor because the two companies inked a five-year deal in September to manufacture server appliances under the Gateway Inc. (NYSE: GTW) brand.