Linux Stocks Face More Challenges

Though the outlook for the OS remains good

By Dominique Deckmyn

May 15, 2000 12:00 PM ET

Computerworld - The new market climate hasn't been kind to Linux stocks. And though tech analysts expect Linux to continue to expand its corporate installed base, few on the financial side say they expect share prices to bounce back soon.
While many dot-com operations have trouble turning a profit, at least they don't generally face the challenge many Linux outfits encounter: making money on what is essentially a free product.
"Even a market leader like Red Hat, which is the clear market share and brand leader, is being hammered," says Bill Epifanio, an analyst at J. P. Morgan Securities in New York.
Still, International Data Corp. in Framingham, Mass., estimates that Linux holds one-fifth of the server operating system market, and Novell Inc. (Nasdaq:NOVL) recently admitted that Linux growth has hurt NetWare sales
Epifanio still rates Durham, N.C.-based Red Hat Inc. (Nasdaq:RHAT) a "long-term buy," meaning investors should consider the stock, but not rush into it.
The outlook for other Linux companies is mixed. Caldera Systems Inc. (Nadaq:CALD) in Orem, Utah, had a lackluster initial public offering (IPO) in March and last Tuesday closed at $11, well below its $14 IPO price.
Because it sells PCs with Linux installed, VA Linux Systems Inc. (Nasdaq:LNUX) in Sunnyvale, Calif., ($47 last Tuesday, down from a peak of $320) has revenue from hardware sales. However, Epifanio says, the company has to compete for that revenue with other PC makers like Dell Computer Corp. in Round Rock, Texas.
Linuxcare Inc. in San Francisco, by contrast, is aimed squarely at services, supposedly the most profitable Linux market. However, it canceled its IPO two weeks ago.
"We would continue to avoid these (Linux) stocks until the current tech correction completes and the companies operating in this space get a couple of quarters under their belts in regard to hitting the numbers," says Fred Dickson, an analyst at Branch Cabell & Co. in Richmond, Va.

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