Fool.com: Say Hello to Today's $10B IPO (News) December 9, 1999

Say Hello to Today's $10B IPO

By Dave Marino-Nachison (TMF Braden)
December 9, 1999

Tired of having to double check and make sure the stock you're thinking about buying is Linux-related? Then we've got just the thing for you: systems, software, and services company VA Linux Systems, which bears a ticker (Nasdaq: LNUX) that's a dead giveaway.

VA Linux stock rocketed an incredible $220, or 733%, to $250 today after the company yesterday sold 4.4 million shares to the public for $30 apiece. The company several times upped its IPO price before today, initial filings suggesting the stock might go for as little as $11 per stub. The company's advisers wisely prompted them to scoot the price tag upward. Sorry, momentum investors, the earliest you could have gotten in today was at the stock's $299 open, nearly a 10-time appreciation. At that point, of course, you were doomed to finish down quite a bit for the day.

But early this afternoon VA Linux stock was at $320 per share, meaning that at approximately 1:30 p.m. EST -- just around the time goggle-eyed Wall Street types might have been returning from lunch had they not been chained to their seats to mind the run-up -- the company was worth nearly $13 billion, more than... well, let's not get into that just yet.

So today you've got various commentators telling media sources that Linux is "hot" because it's an alternative to Microsoft's (Nasdaq: MSFT) operating systems. Why those reporters had to get that piece of info from an analyst is beyond me; they might as well have just made the declaration themselves and saved a quarter.

Linux is favored for its speed in managing Internet servers and its open-source architecture, which allows tinkerers to fix bugs themselves, and to develop and distribute improvements freely over the Internet. Click here for an interesting take on Microsoft and Linux from the Rule Maker archives.

It must get frustrating looking for new analysts to call every few days to ask the same old questions about the recent staggering run-up in Linux-related stocks like Red Hat (Nasdaq: RHAT) and Perle Systems (Nasdaq: PERL). It's been hard to miss, though I confess to selling readers short in September when I didn't make nearly enough fuss about Corel's (Nasdaq: CORL) Linux connection. A little Red Hat takeover talk and that company's shares were set similarly alight.

What's an investor to think about all this beyond "Should I or shouldn't I?" When you see a stock leap like Linux-related shares have been -- tenuous as the connection sometimes is -- your first reaction should be to realize that with this kind of apparent opportunity comes very, very serious risk.

OK, fine. Your next step might be to try and figure out what exactly you know about Linux and the market opportunity for companies like VA Linux and Red Hat. At this point you might want to consider that if you don't already know the server and operating space pretty well from an investment perspective -- let alone a technical perspective -- it won't get any easier on this excursion.

If you're going to do that, by the way, check out our VA Linux message board, which was brimming with action today. There you can discuss topics like: What exactly do they do? What are the revenue streams? What are the profit margins like? Is the biggest growth opportunity in the server, PC, or wireless device space? What are OS-market competitors like Microsoft and embedded systems software companies like Wind River (Nasdaq: WIND) planning to do to fight back? And how many gunslingers does this town have room for?

OK, now put a price on it, clawing through the leaky balance sheets and cash flow statements held together by equity sales to put some kind of value on the business model.

Of course, you might be the only person out there doing all that work. Any market that bequeaths a company with $18 million in fiscal 1999 (ended July 31) sales and $15 million in fiscal year losses with $12 billion in market value by the end of its first afternoon on the public markets simply can't have taken that kind of time to make up their minds.

And so you're left with two choices: stand back and watch or jump in, hold on, and pray you'll be out before the wave breaks. If you're smart, you'll still be able to find your notes when it's all over.

Related Links:
VA Linux
VA Linux Message Board
Rule Maker, 11/24/99: "Microsoft vs. Linux"
Fool News, 11/15/99: "Red Hat and Cygnus Form Linux Link Up"

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