The Elvis days of Linux are past

Record pops in stock prices fueled by exuberance for the comparatively new operating system have been replaced by a more gloomy reality in which several Linux stocks have sunk below their initial public offering prices.

Red Hat chief financial officer Hal Covert said in an interview that it hasn't been pleasant watching the company's stock price plummet. "We're always concerned when our stock price goes down," Covert said. But the company, he added, is undaunted.

"We have a great business plan. We think we'll be able to double our revenue year-over-year for the next several years," he said. The company expects to break into profitability midway through its fiscal year 2002--roughly halfway through calendar 2001.

Still, there's little question that the Elvis days of Linux are past. VA Linux, the most extreme example, has dropped from a peak of $320 to today's price of $37. And Red Hat, the first Linux company to go public, has dropped from a split-adjusted high of $151.37 to today's price of $26.38.

Linux, a clone of the Unix operating system collectively developed by Linus Torvalds and hundreds of programmers worldwide, has surged in market share as more Web site developers and corporate IT managers have discovered its virtues and low-cost appeal. In some uses, the OS is giving Microsoft a run for its money.

Though the popularity of Linux has risen, the assured financial success of a Linux company no longer is an assumption.

"I think people are saying this is going to be a longer slog" than originally anticipated, said Booz-Allen & Hamilton analyst Barry Jaruzelski. "People are getting a little more sober about expecting real revenue and real profits."

Covert, too, acknowledged that investors are less patient with the general business strategy of IPO now, profitability later. Disgruntlement was most noticeable during last week's market bludgeoning.

Red Hat, however, fits a different category, Covert asserted. Investors are "tired of people who have less-than-expected revenue growth, narrow gross margins and huge operating losses, none of which we fit into," he said. The company's gross margins were at 46 percent last year and will push into the 60 or 70 percent range, Covert predicted.

Some of the diminished investor enthusiasm for Linux is a hangover from the sour experience some investors had with unprofitable Internet companies, he said. At the same time, he added that "some of the Linux companies (are) overvalued relative to their business plan."

Though he didn't name names, the candidate list is only six names long. Linux companies that filed IPO plans after Red Hat were VA Linux Systems, Andover.Net, Caldera Systems, Linuxcare, Linuxone and Cobalt Networks.

But Red Hat or other companies planning aggressive growth aren't totally insulated from their stock prices.

"Clearly, the less high their valuations are, the less paper money they have to do deals with," Jaruzelski said.

Red Hat's stock may have dropped, but that hasn't stopped it from acquiring other companies. The company yesterday announced a plan to acquire BlueCurve, a maker of software for monitoring networks for trouble spots or bottlenecks.

Covert said Red Hat plans to continue its acquisition plans--a strategy International Data Corp. analyst Dan Kusnetzky believes is sound.

"They're muscling up where they had weaknesses. They're doing an awful lot of smart things," Kusnetzky said.

Red Hat faces competition not only from other Linux sellers but from companies such as IBM that have their own designs on the Linux market.

"If IBM Global Services starts deploying massive resources for (Linux) services, how can any start-up effectively respond to that? That's pretty daunting competition," Jaruzelski said.

Kusnetzky and Jaruzelski remain optimistic, arguing that the lumps Linux stocks have taken were merely a correction. "It reminds me of the early days of Netscape. Clearly it did not pass any rational analysis," Jaruzelski said. "Eventually you have to add those dollars and cents up."