April 14, 2000 2:30 PM PDT

Sour market pushes Linux stocks below IPO prices

The dour mood on Wall Street has dragged three Linux company stocks below their initial public offering prices, and others aren't far behind.

Linux seller Caldera Systems, which debuted at $14 a share in its IPO less than a month ago, closed regular trading today at $9.56, down 11 percent. Andover.Net, the collection of Linux and programming Web sites that launched in December at $18 a share, closed at $10.13, down nearly a third. And VA Linux Systems, the Linux computer maker whose $30 IPO price soared a record 697 percent to close at $239.25 on its opening day, today sank to $28.94, a drop of 19 percent.

The market hammered all technology stocks this week, but it's not unusual for prices to settle after an IPO spike. The Linux stock slide has been going on for months. Still, the continuing decline will likely force investors to revisit the ongoing debate surrounding Linux: How does one make money from software that can be obtained for free?

Other Linux companies aren't faring well.

Red Hat, the purveyor of Linux software and services, closed at $24.13, down 13 percent for the day. Although today's price bests Red Hat's split-adjusted $7 IPO price, the stock was trading near $80 last month.

Even Cobalt Networks, which builds special-purpose Linux servers that are a prominent part of the booming "server appliance" trend, has seen better days. After a December IPO--in which its share price was set at $22 and then rose to $128.13 on opening day--it plunged 23 percent to $41.50 today.

Linux is a clone of and competitor to Unix, though analysts agree it doesn't have the high-end features that allow it to work well on computers with dozens of processors in the same way as versions of Unix from IBM, Sun Microsystems, SGI, Compaq Computer and Hewlett-Packard. Linux also competes with Windows, which is common in low-end servers.

Linux is collectively developed by an informal network of programmers. Only some of the vast pool of developers work at Linux companies. They use the "open source" method, under which the programming instructions for the software may be freely shared, modified and redistributed.

Linuxcare, another company that is planning an IPO, cited the unfavorable CNET's Linux Center Wall Street climate in delaying its shares sale--though the departure of chief executive Fernand Sarrat was the main factor.

Profits are remote for many Linux companies. Although analysts agree that Linux is a formidable force on the computing landscape, the tricky part is making money off the operating system's popularity. Analysts say future profits will largely come from consulting and service fees.

Linuxcare said in a Securities and Exchange Commission filing that it expects to be unprofitable in 2000 and 2001. Red Hat expects profitability seven quarters from now, according to a company representative. VA chief executive Larry Augustin said analysts expect his Linux computer company to become profitable in late 2001 or early 2002.

The slumping technology market means venture capitalists and investment bankers are becoming less tolerant of long waits to profitability.

The market conditions also can't be good news at Santa Cruz Operation, Corel, Enlighten Software, SGI or other companies trying to rebuild their business plans around Linux.

 

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