Novell Turns It Around

Editor's note: This Stocks Under $10 alert was originally sent to subscribers April 25 at 2:01 p.m. EDT. It's being republished as a bonus for TheStreet.com and RealMoney.com readers.

---

In looking for attractive stocks in the under $10 sector, we've found a number of candidates in the software industry. One of these is Novell(NOVL), a provider of proprietary software that is a potential turnaround story for risk-averse investors.

In our Stocks Under $10 model portfolio, we already have one pure-play software name and another with exposure to the shift toward the Linux-operating system, so we are not adding Novell to the model portfolio.

However, a number of drivers lead us to believe that shares of Novell are an attractive investment in 2007, though not in the top 15 to 20 stocks that make up our portfolio. The company has done a great job revitalizing its prospects by focusing on customers' shift toward open-source software such as Linux.

And even though it's unlikely Novell will ever reach the size and scope of software giants like Microsoft(MSFT) and Oracle(ORCL), that doesn't mean investors can't make money betting on the underdog.

Fall From Glory

Compared with most firms in the tech space, Novell has a rather long history. The company introduced its original signature operating system, NetWare, in the early 1980s. Over the next decade, Novell gained market share and became a major player in providing software to businesses as they embraced the benefits of large computer networks.

Although Novell ended up being one of the many firms run over by software juggernaut Microsoft, the company has survived and continues to offer an array of infrastructure software and services to more than 50,000 customers.

Ironically, the long-term outlook for Novell got a boost in November after the company announced it will collaborate with Microsoft to enhance the interoperability between Novell's SUSE Enterprise Linux and Microsoft's Windows software. Since that announcement, Novell has inked five major Linux-related deals in conjunction with Microsoft, including adding Wal-Mart(WMT) and American International(AIG) as new customers.

Although we don't believe the major deal signings will continue at the same pace, the alliance with Microsoft has put Novell in a better position to compete with Red Hat(RHT), the leading provider of Linux-based products and services.

Like many other major software companies, Novell's revenue comes from a combination of new-license sales and recurring maintenance and services fees. Its software products include identity- and resource-management software, as well as a stable of Linux platform products, which offer the most promising growth potential going forward.

However, total revenue has suffered because of weakness in the company's NetWare segment, which has been in decline for years and posted a 60% year-over-year decrease in sales in the most recent quarter. NetWare is a somewhat outdated operating system that continues to lose customers to better options (mainly Microsoft alternatives).

Other major products showed flat to slightly negative growth rates, most notably the company's Open Enterprise Server software, which represents almost 20% of total revenue, and its global services segment, which accounted for more than 30% of revenue last year.