VA Linux Makes a Record Debut
VA Linux Systems, a maker of high-end computers that run the hot Linux computer operating system, saw its shares soar a record-breaking 698% on its first day of trading.
The Sunnyvale, Calif.-based company, nearly 5 years old, stunned market watchers Thursday as its stock jumped from its initial offering price of $30 to open at $299, and then to close at $239.25 on Nasdaq. The company raised $132 million through the sale of 4.4 million shares.
VA Linux’s first-day increase beat the previous record of 606% set a year ago by Theglobe.com , a Web portal that allows users to create online communities.
The VA Linux stock’s first-day performance could be seen as a sign that investors see a bright future for the Linux system as a rival to Microsoft’s Windows NT for high-end computers.
Some analysts, however, characterized Thursday’s run-up of VA Linux as an “irrational” and “emotional” movement by investors to grab anything on the Linux bandwagon.
“This is buying into a dream, and when people wake up, the dream might not be there,” said Dan Kusnetzky, program director at the Framingham, Mass.-based research firm International Data Corp. “This is overblown.”
Linux was created by Linus Torvalds of Finland in 1991, when he was still a student. His idea was to replace the Microsoft operating system on his personal computer with a different version of the Unix operating system, another operating system used in high-performance computers. A computer operating system is the software that controls the basic functions of a computer.
Investor frenzy over Linux companies is only a few months old. The buying spree began in August with the initial public offering of North Carolina-based Red Hat Inc., which sells its own bundled version of the Linux operating system and provides support for its customers--a key issue for corporate buyers.
On its first day of trading, Red Hat’s stock more than tripled from its offering price of $14 to a little more than $52. On Thursday, Red Hat closed at $286.25 on Nasdaq.
On Wednesday, shares of Andover.net Inc., an online provider of news and information about Linux, more than tripled in their trading debut on Nasdaq to close at $63.38. The company’s stock was further boosted by VA Linux’s opening Thursday, adding $14.13 to close at $77.50
Corel Corp., another company that puts together an easy-to-install Linux version, also saw its stock leap on Thursday, climbing $10.94 to close at $39.25 on Nasdaq.
For its latest fiscal year, ended July 31, VA Linux Systems lost $14.5 million on total revenue of $17.7 million. As of the close of trading Thursday, however, the company’s market capitalization was a stunning $9.5 billion, surpassing those of established companies such as AMR (the holding company for American Airlines), utility Edison International and Ralston Purina. Its market capitalization is, for example, more than three times that of U.S. Steel.
Irv DeGraw, research director for the online financial research firm Worldfinancenet.com, said that even given VA Linux’s promising future, the Thursday rise in its stock seemed somewhat out of line.
“VA Linux is . . . the best Linux company out there. It is a real company with a real product, but it’s not this great,” DeGraw said. “The market has always gone through fads, and now we’ve moved on to a new one--Linux.”
Companies such as VA Linux, Red Hat and others hope to make money by providing bundled products that include support and service--a key component for corporate buyers, which have had few places to turn for help with Linux. VA Linux produces high-performance computers, using Intel microprocessors that are known for their speed and reliability. Its customers include Akamai Technologies, EToys and StarMedia Network.
Technology analysts noted that the huge infusion of cash into Linux companies over the last few months has given the operating system a level of legitimacy and power that few could only dream only a year ago.
“These initial offerings over the past few months are legitimizing Linux just like IBM legitimized the personal computer,” DeGraw said.
Kusnetzky of International Data said the interest in Linux stems from its rapidly growing share among the computers known as “servers” that hold the information for Web pages and e-commerce sites.
He said that investors sense the potential for the operating system to become the backbone of the Web and, because it is free, to also become a significant player in providing the software for the expected wave of new digital appliances, such as video recorders and mobile computers, that will need an operating system.
But he added that all the major computer companies, including IBM and Dell, now offer Linux-based systems and will be tough competition.
He said the biggest problem facing the Linux companies is simply that the market is not that big at this point.
“If you look at these companies’ revenue, the potential market growth and the stock price, and then you calculate it out, even if you consider an unreasonable level of growth, like 100% a year, you still end up with very small companies,” he said. “There still isn’t a lot of money in the Linux market.”
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Leapin’ Linux
Since the initial public stock offering of Red Hat Inc. in August, the stocks of new Linux-related companies have soared. On Thursday, VA Linux Systems broke the stock market record for the largest one-day gain of an initial offering, closing at $239.25 a share, up 698%. Linux-related companies, that have gone public recently, ranked by performance since 1999 offering:
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IPO IPO Thurs. %Gain Company date price Close Since IPO Red Hat 8/11 $14 $286.25 +1,945 VA Linux Sys. 12/9 30 239.25 +698 Cobalt Net. 11/5 22 140.88 +540 Andover.Net. 12/8 18 77.50 +331
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Source: Bloomberg NewsLinus Torvalds created Linux.
