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The Linux IPO Backlash: Wall Street's Revenge

Dec 13, 1999, 19:09 (31 Talkback[s])
(Other stories by Eric Lee Green)

By Eric Lee Green

[ The opinions expressed by authors on Linux Today are their own. They speak only for themselves and not for Linux Today. ]

It was inevitable: Wall Street insiders are fighting back against the high valuation put on Linux stocks, using sneering phrases like "companies that have never made money" and "a tiny company with dim prospects goes public with a bang". They sneer that Linux stocks are being driven up by ignorant day traders who are ignoring the fundamentals. Yet -- what are the fundamentals?

It appears that these Wall Street insiders (who quote each other in their sneering remarks) are guilty of three sins: avarice, hubris, and willful ignorance.

Avarice

These Wall Street insiders did not get in on these IPO's because they were not aware of Linux prior to the last couple of months, and thus they're not getting the chance to make money off of them. But if the stock price was lower, maybe they could make money by buying them. Getting the picture?

Hubris

All these "ignorant" people (read: Linux enthusiasts, computer geeks, etc.) are making money. Why, these "ignorant" people don't have MBA's from Harvard like these Wall Street insiders, how DARE they think they know what they're doing? Why, everybody knows that if you don't have an Ivy League MBA, you're pond scum. At least, if the "everybody" you're talking to is a Wall Street insider.

Willful Ignorance

I will be charitable here. Rather than accuse people of deliberately lying, I will state that they are guilty of willful ignorance.

Red Hat Software and VA Linux Systems are companies that have a lengthy track record that is public knowledge. Each of these companies is at least five years old, and each was profitable until they decided to go the venture capital/IPO route. Each is a leader in their particular market space. We are not talking about new companies that aren't even delivering a product. We're talking about known, proven commodities, companies with a track record.

Fundamentals are far more than just this year's profit/loss statement. Red Hat Software and VA Linux Systems together have the largest collection of Linux authors and Linux talent on the planet, more than all other vendors combined. That Linux talent has a value -- a value that the Wall Street insiders are overlooking. If Linux is going to overtake Windows NT as the workgroup server of choice, which is indeed possible (Linux already has overtaken Windows NT in the web server market), these two companies have an excellent chance of being able to capitalize that talent. They also have good name recognition, and in VA's case, a marketable domain name (linux.com) that can be used to provide additional value to their brand. These are assets that no other company can currently bring to bear in the Linux market.

So yes, it's a gamble. And yes, the stock is probably overvalued -- at the moment. On the other hand, even at today's overinflated value you're still likely to break even if you hold it for at least five years. These companies have been in business for five years or more, and it is likely that they will remain in business for another five years. During that period of time, their stocks are likely to split several times. Thus even if you buy Red Hat for $250 today and it's selling for only $60 five years from now, all that has to happen is for it to split five times and you've at least broken even (accounting for inflation, of course).

In the meantime: I wouldn't buy Red Hat or VA Linux stock today. Breaking even in five years isn't my idea of a good way to invest. But the statements being made by Wall Street insiders -- accusing people of ignorantly buying "hype", and bad-mouthing companies using statements that are factually incorrect -- are slanders that reek, and which need to be strongly corrected (in a polite manner, of course).

Footnote: It is amazing, but true, that writers for e-zines appear to be running for cover whenever they mention the word "Linux" in one of their articles. EMAIL addresses are disappearing all over the world in order to hide from Linux flamers (otherwise known as "that Slashdot crowd" by journalists). The problem is that this also hides them from people who would correct their misconceptions with factual statements, thus leaving them to be publically embarrassed in articles such as this one. In the past I've privately contacted journalists with corrections and they haven't made those same mistakes again. Alas, it appears that the days of journalists willing to be educated by Linux insiders are over.


--Eric Lee Green