Tech Industry

Companies enjoy upbeat line on Linux

The stock prices of three pure-play Linux companies get big boosts in August, after a solid second-quarter report and bullish announcements for the open-source industry.

The stock prices of three pure-play Linux companies have received big boosts in August, after a solid second-quarter report and bullish announcements for the open-source industry.

Shares of VA Linux, the largest Linux company by revenue and market capitalization, are up 39 percent since the end of July. Although shares of VA Linux are well below their 52-week high of $320, the stock has jumped nearly 19 percent today. It was at $44 in midafternoon trading, $6.88 more than yesterday's closing price.

The Sunnyvale, Calif.-based company surpassed analyst expectations yesterday by reporting revenue of $50.7 million and a loss of 10 cents a share, a nickel better than analysts predicted.

Shares of other Linux companies piggybacked on the positive report from VA Linux.

Durham, N.C.-based Red Hat, which provides open-source software and services, is up 33 percent since late July. The stock was at $24.63 in midday trading today, up almost 8 percent from yesterday.

Mountain View, Calif.-based Cobalt Networks, which develops special-purpose servers based on Linux, is up 10 percent since late July. The stock was at $49.81 in midday trading today, inching up 4 percent from yesterday.

Analysts said the companies' stock surge in recent weeks may not be a temporary blip but a potential indicator of longer-term gains for the volatile sector. Linux-oriented companies were the rage last year, when VA Linux set a record for first-day stock-price gains, but the company has stumbled badly since the spring market meltdown.

"I think the prices of these stocks will continue to go up," said WR Hambrecht analyst Prakesh Patel. "The opportunity is large, but you want to look for companies that are making money, and you want to look at companies that have leading market share."

The positive earnings announcement from VA Linux is not the only factor contributing to bullishness among open-source investors.

At the LinuxWorld Conference and Expo seminar, a group of blue-chip technology companies attested to the usability of the Linux operating system in general, good news for all companies that use Linux as part of their business models.

"EMC, Compaq, Sun all showcased

Favored few
Shares of some Linux-related companies have jumped in August, but many others have continued to slide.
Name % change: 52-week high to 7/31 % change: 7/31 to 8/24
Direct Linux plays
VA Linux Systems -90 +39
Red Hat -88 +33
Caldera Systems -79 -23
Indirect Linux plays
Cobalt Networks -73 +10
Corel -93 +12
SGI -67 +8
Applix -84 -4
eSoft -88 -15
Enlighten Software -84 -36
Source: CNET Investor
their progress and support for the Linux operating system. These are large technology companies," Patel said. "It's a sign that Linux is not a fad; it's here to stay and delivers real solutions for companies."

In July, research firm International Data Corp. released an enthusiastic report on Linux. According to the report, shipments of Linux operating system software for running servers will rise more than 28 percent a year to 4.7 million units in 2004 from 1.3 million in 1999.

The report also predicted Linux revenue will increase 23 percent annually, but the growth will result in total revenue of only $85 million in 2004.

"I think that has helped the visibility for Linux stocks," said Merrill Lynch analyst Bill Crawford.

Despite stock pops for the largest Linux companies, the good news has not trickled down to second-tier companies. Corel and SGI, whose stocks trade below $5, are up just cents from their July 31 prices. Applix, eSoft and Enlighten are also down.

Although issuing a press release touting a company?s Linux orientation used to generate a stock surge, some analysts say that?s no longer enough. They say they are more closely scrutinizing the fundamentals of specific companies before investing, and that?s why the stock prices of companies in the same niche vary widely.

"Initially, anything Linux had a high value. Now I think you're going to see that the individual performance is going to be more of a factor in the stock price (of these companies)," Crawford said. "These stocks will move less as a class."