Another wave of


plays is ready to blanket the IPO market, but this time around the reception stands to be decidedly chillier.

You remember Linux, of course.

Red Hat's


can't-miss IPO last summer acquainted many investors with the open-source computer operating system, which has been touted as a potential competitor to


(MSFT) - Get Report


. In December, the frenzy reached fever pitch, producing the hottest IPO ever, a 733% first-day gain in shares of Linux hardware concern

VA Linux Systems



But since then, investors' ardor has cooled amid mounting doubt about the viability of a business built around a free operating system. The public Linux companies, afflicted by questions about the uniqueness of their offerings, find their shares sharply off their first-day peaks. Add to those concerns the worries some techies have about

security and you have a depressed group of stocks.

Now, with several high-profile companies making their way toward the public markets and venture capital continuing to roll in, the coming months promise to be pivotal. Some observers expect the more robust business plans of the new companies to sustain them through the market's gyrations. But whether the new issues can attract institutional investors who have been skeptical of the Linux business may prove critical to their success.

What They Do

Some people say the slide in Linux stocks doesn't necessarily bode ill for future offerings. In particular, industry watchers are focusing on firms that build applications on top of the operating system. This approach should expand Linux's reach, which promises to permit more compelling business plans than just peddling a version of the operating system or hardware related to it.

Down With Linux
Investors knock Linux stocks for a loop

Source: BigCharts

"I think the things out there now are not yet the highfliers," says Hadar Pedhazur, founder of

Opticality Ventures

. He says venture capital is flowing into privately held Linux companies, despite the beating the sector is taking on the Street. "The new companies will make software on top of Linux and will extend the reach of Linux into new application spaces."

According to

International Data

, there are more than 145 companies, most of them still private, focusing on Linux products. Linux services company


is expected to go public in April, and open-source tools and services companies




, which develop e-commerce and Internet infrastructure software on open source software, are expected to file for IPOs soon.

Where It Started

To some extent, Linux stocks may simply be suffering from a brilliant start and massive expectations. The Linux craze started with the August IPO of software concern Red Hat, whose shares soared 271% on the first day. Subsequent IPO highlights include Linux server appliance maker

Cobalt Networks


, whose shares jumped 482% in a November initial public offering, and VA Linux, which soared to record heights in its December IPO, according to

Thomson Financial Securities Data


But Linux investors haven't kept up with the early heady pace, as shares in stocks such as Red Hat, VA Linux and



have fallen by more than half from their early peaks. Even Red Hat, the best-known Linux play, was 67% below its 52-week high at its recent price of 45 11/16. Meanwhile, the performance of IPOs in the sector has weakened as well:

Caldera Systems'


March 21 IPO saw the shares merely double in the first-day aftermarket.

Big Time

Some observers attribute the decline in Linux stocks to a lack of institutional support and to weak business fundamentals. "I don't think it was ever really institutional money that was backing the success of these companies," says Paul Saperstone, technology analyst with

John Hancock Funds

, which owns shares in Cobalt and VA Linux Systems. "I don't think you're going to see significant commitments by institutions because they recognized that the business models were suspect."

Indeed, according to


, just 21% of Red Hat and 17% of VA Linux Systems are owned by institutions, far below the 40% threshold regularly crossed by institutional favorites such as




"The fundamental strength behind Linux has never been stronger, but the valuations offered were certainly at the high end," explains Phil Rueppel, a computer systems and Internet infrastructure analyst for

Deutsche Banc Alex. Brown

, which has a buy rating on VA Linux and did underwriting for the company. "Once we get more than a couple of public stocks out there, I think we'll be able to evaluate the group as a whole much more easily."