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If it says Linux, investors want it

From Java to "dot coms," investors have a way of latching onto the latest tech trend and driving stocks to dizzying heights. Linux firms are the newest Wall Street darlings.

From Java to "dot coms," investors have a way of latching onto the latest tech trend and driving stocks to dizzying heights--and Linux companies are the newest darlings of Wall Street.

Companies focused on Linux, as well as those that merely mention the open-source operating system, are posting chart-topping gains as investors pile into the stocks.

VA Linux, for example, jumped nearly 700 percent on its first day of trading last week, breaking the record for the largest first-day gain of any initial public stock offering. VA sells mainly servers that run the Linux operating system software.

The Linux connection
Public companies that are primarily involved with Linux:
• VA Linux Systems
• Red Hat
• Andover.Net
• Cobalt Networks
Linux-related companies that may go public:
• TurboLinux
• LinuxMall
• Caldera Systems
• Collab.net
• Linuxcare
Public companies that have seen their stocks rise due to Linux ties:
• Corel
• eSoft
• V-One
• Learn2.com
• Santa Cruz Operation

Linux, a Unix-like operating system, was developed by Linus Torvalds and countless other programmers. It has made its way into the product lines of the world's biggest computing companies and some believe it represents a direct threat to Microsoft's grip on the OS market.

Linux has been in the investing limelight since August, when Red Hat became the first Linux company to go public, bursting out of the gate with a threefold gain on its first trading day.

But it isn't just the pure Linux companies that are getting some Wall Street action. Several other companies have also benefited from a loose Linux affiliation.

V-One, for example, soared 279 percent to $13.5 earlier this month, after the network security product maker announced its SmartGate software would be compatible with Red Hat's 6.0 version of its Linux operating system. But the shares plummeted the next day, giving up most of the gains.

Meanwhile, Learn2.com, an educational software maker, climbed 64 percent yesterday after it announced it would sell Linux tutorials.

Corel's chief executive also attributes some of his company's recent stock surge to its increased emphasis on Linux products. The software company said it expects to receive half its revenues from Linux in the next five years.

"With the early 'dot com' companies, everyone knew the Internet was growing rapidly and everyone was looking for ways to play it in the equity markets," said Mat Johnson, an analyst with Thomas Weisel Partners. "This pretty much holds true for Linux related companies, but we only have a few pure plays for the operating system. There is a scarcity issue, so those companies will get bid up--and any with a tangible relation to Linux."

Four Linux companies have debuted this year: Red Hat, Cobalt Networks, VA Linux and Andover.Net, which operates Web sites with programming and Linux news. But investment bankers said there are at least six in the pipeline for the first quarter.

Despite the uncertain future of Linux, these young companies have some remarkable market capitalizations: Red Hat, $16.7 billion; VA Linux, $7.1 billion; Cobalt, $3.1 billion and Andover.Net, $712 million.

Meanwhile, corporate investors and venture funds are also throwing money at Linux-related companies before they hit the public markets.

Linuxcare, for example, received $32.5 million to spur its expansion. The company, which sells Linux technical support and consulting services, received investment offers totaling $300 million.

Corporate investors such as Intel are also betting heavily on Linux companies. Intel has invested in such companies as SuSE, which makes a Linux operating system that is used in Europe. Other Linux companies that received Intel's money include Red Hat, VA Linux and TurboLinux.

Johnson noted that with any hot market, investors need to be careful about which companies are true Linux plays and which are merely taking a me-too approach.

"Investors will need to look at the companies and see how they are involved with Linux," he said.

Dan Kusnetzky, an analyst with International Data Corp., said the performance of the Linux IPOs has investors acting irrationally.

"Investors are buying into a dream...and like any dream, they can wake up and find the dream wasn't real," Kusnetzky cautioned.

For example, Applix, an office suite software company, has seen its shares rise fivefold since the summer as it touts its Linux affiliation.

"The company was bid up because of its association with Linux," Johnson said. "That association is somewhat hyped."

Applix makes software for Linux, as well as other major operating systems.