VA Linux: Caught by the IPO jinx?

VA Linux Systems, which holds the record for the highest first-day jump in a public offering, sees its stock fall 22 percent after announcing layoffs amid slowing growth.

Margaret Kane Former Staff writer, CNET News
Margaret is a former news editor for CNET News, based in the Boston bureau.
Margaret Kane
4 min read
Is there an IPO jinx for those one-day highfliers? VA Linux, which holds the record for the highest first-day jump in a public offering, saw its stock fall 22 percent Wednesday after the company announced layoffs amid slowing growth.

VA Linux Systems said Tuesday that it would lay off 139 workers, or around 25 percent of its staff. The company posted a loss of $13.4 million, or 28 cents per share, on sales of $42.5 million, compared with the 20 cents per share, or $6.3 million, it lost in the year-ago quarter. It had previously warned investors that it would lose between 24 cents and 28 cents per share.

It's quite a turnabout for VA Linux, which set the record for one-day stock performance in December 1999, jumping nearly 700 percent. While demand for the stock was expected to be strong, the jump from an open of $30 to a high of $299 stunned analysts.

It has been downhill ever since.

The record had previously been held by TheGlobe.com, which rose from $9 to $87 in one day in November 1998. Shares of that company's stock closed at 38 cents Tuesday, down from its 52-week high of $97.

That firm has been through the wringer, restructuring and laying off staff, although it now says it expects to reach profitability by the end of 2001. But that may not be fast enough--it has received notice that it is subject to delisting by the Nasdaq because of its woeful stock price.

One thing both those IPOs had in common is hype. TheGlobe.com, a community site, went public in the days when it seemed that anyone with a dot-com name and a venture capitalist's ear could start his own company, and investors were quick to grab the stock. But as investors and analysts realized just how hard it was to make money online with a content-based site, the analysts and the investors faded away.

VA Linux rode the hype about Linux to astonishing heights with its IPO in December 1999. But while there may have been a more solid base to this story--Linux has certainly made its mark on the IT world--the operating system hasn't yet toppled Windows. And other, larger firms have also realized the importance of Linux, and have grabbed a large chunk of VA Linux's business.

A high-flying IPO is clearly no guarantee of everlasting stock success. Even the granddaddy of superstar tech IPOs, Netscape, eventually fell prey to financial performance issues and was gobbled up by America Online, now known as AOL Time Warner.

Soaring and souring
Days before TheGlobe.com's offering, Earthweb had stunned investors by soaring more than 1,000 percent in its two days of trading, closing at $66.38 after being priced at $14. The stock closed at $5.50 Tuesday.

"It doesn't take very long to go from victor to vanquished," said Randall Roth, research analyst at Renaissance Capital, who said institutional investors may have been the worst hit by these deals. "When the bottom dropped out, there wasn't a heck of lot of faith (in the companies) to begin with, so the selling is also fast and furious."

According to Renaissance Capital, only six out of the top 25 first-day performers in 2000 are still trading at or above their opening price. And those six firms--WebMethods, Avanex, Marvell Technology, Riverdeep Group, ONI Systems and Active Power--are nowhere near their first-day highs.

But that may have as much to do with the nature of the IPO market as the hype around tech stocks.

Going public brings a great deal of attention to a company, possibly the most it will ever get. And for some firms, the IPO may also signal the "last hurrah," Roth said.

"There's never going to be more attention lavished on these companies than the day they price unless they become huge established companies," he said.

The challenge to investors, of course, is figuring out which ones will pay off.

In VA Linux's case, the company has been hit by the general slowdown affecting tech firms, as well as increased competition.

Prakesh Patel of WR Hambrecht reiterated a neutral rating on VA Linux on Wednesday, citing increased competition from companies like IBM and Dell, which have "more established relationships and greater resources." He said VA Linux would face continuing downward pressure on gross margins.

"With an unclear outlook going forward, we believe that the stock price performance of VA Linux will experience downward pressure until the company proves that it can capture the still tremendous growth opportunity of the Linux market and post solid financial results indicative of its market leading differentiation," he wrote.

Patel also lowered revenue estimates for the third quarter of fiscal 2001 to $29.4 million from $44 million, and dropped fiscal year estimates to $168.5 million from $194.2 million. He dropped loss estimates to 30 cents per share for the quarter and 94 cents per share for the year, down from 25 cents and 90 cents.

Credit Suisse First Boston dropped its rating on the stock from "buy" to "hold," J.P. Morgan cut its rating from "long term buy" to "market performer," and ABN AMRO reiterated a "hold" rating.