The Linux Lineup Gets Longer

Will the second crop of companies affiliated with open-source software be as hot as the first?
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Everything is moving faster in the new millennium, including the speed with which tech-stock investment fads rise and fall.

Witness the swift decline of some of December's darlings, the small group of companies that have exploited the investor love affair over the Linux open-source software movement. Shares of Linux-oriented companies like

VA Linux Systems

(LNUX)

,

Cobalt Networks

(COBT)

,

Andover.Net

(ANDN)

and

Red Hat

(RHAT)

are down an average of 56% from their highs. Each company's stock remains healthily above its initial public offering price, however, and far ahead of any reasonable valuation based on fundamentals.

The upshot: Not only are first-day pops meaningless -- check out how shares of

theglobe.com

(TGLO)

are twisting in the wind -- but Wall Street has shown that only the most legitimate of highfliers can stay on the tightrope.

More Linux promoters are coming, of course. The "tell" on the strength of the fad will be whether the next crop can produce the same initial returns as their peers, including the ones that have been experiencing a slow leak ever since their IPOs. More important still will be how the increased supply affects the prices of those left standing.

In the dawn of the Internet-stock craze -- two or three years ago -- new stock stars would run up for months before professional and retail investors alike paused for a reality check.

Amazon.com

(AMZN) - Get Report

, then just a bookseller, traded without a serious hiccup for a solid year after its mid-1997 IPO.

eBay

(EBAY) - Get Report

, when it confined itself to auctioning Furby dolls and Beanie Babies, enjoyed nine months of virtually uninterrupted gains on Wall Street.

Not so VA Linux Systems, the holder of the championship belt for one-day gains after an IPO. VA Linux, which has a robust but low-barrier-to-entry business selling server computers that run on Linux software, rose as high as 320 from an offering price of 30 on Dec. 9, closing that day at 239 1/4. The stock has been dribbling down ever since, closing down 6% Monday at 115 1/4. That still gives VA Linux -- which owns and operates the

www.linux.com

Web site -- a valuation of $4.6 billion on trailing fourth-quarter sales of $30 million.

Andover.Net, an information site devoted to Linux, caused a similar stir when it jumped from a Dec. 8 offering price of 18 to a high of 90 (a level it's never seen since) before ending first-day trading at 77 1/2. The tiny company (1999 sales: $2.6 million) dispelled the notion that underwriter

W.R. Hambrecht 's

so-called "open IPO" process would allow issuers to get the most money investors were willing to offer. But that's a good thing for W.R. Hambrecht's customers. The stock closed down 13% Monday at 26 3/4.

Cobalt Networks, a maker of Linux-based server computers that specialize in information storage, has also traveled mostly southward since the high of 172 it hit three weeks after its Nov. 5 IPO. Despite a 15% increase Monday, Cobalt Networks is at 78 1/2, well below that high as well as its first-day close of 128 1/8. Even Linux leader Red Hat, though far above its IPO price, is down from its split-adjusted high of just over 151. It closed down 11% Monday at 95 1/8.

These, of course, are just the beginning of the Linux deluge. San Francisco-based consultants

Linuxcare

aims to raise as much as $92 million in an offering led by

Credit Suisse First Boston

, the same firm that took VA Linux public.

LinuxOne

, a Mountain View, Calif., firm that started offering a beta version (one that is not fully baked) of Linux software in November -- and therefore reports no revenue in its intial federal filings -- is attempting to raise as much as $24.8 million through underwriters

Capital West Securities

of Oklahoma City, Okla.

Perhaps the best sign of the Linux times, however, is Memphis-based

eOn Communications

, maker of equipment that integrates voice, data and email systems. When eOn first filed to go public in April in an offering led by

J.P. Morgan

, it was called

Cortelco Systems

, and among its business lines was a cellular-telephone service re-seller operation in Puerto Rico. The word Linux did not appear in its prospectus.

By November, and with an acquisition under its belt, the renamed eOn -- now with underwriters

Needham

,

A.G. Edwards

and W.R. Hambrecht -- casts itself as a Linux company that designs, develops and markets "next-generation Linux communications servers and software which integrate and manage voice, email and Internet communications for customer contact centers and other applications."

Is eOn trading on the Linux buzz?

"Nothing has changed in terms of what the company does or what its product direction is," says a spokesman. "What is featured and emphasized

in the prospectus certainly has.

Linux is an important part of the story and one that people are interested in."

No argument there.

Adam Lashinsky's column appears Tuesdays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at

alashinsky@thestreet.com.