The glow around all-things Linux continued Monday with the two major distributors of the open-source operating system rising well ahead of the Nasdaq Composite's 1.7% gain. The latest bout of Linux fever began last Wednesday amid a flurry of positive news:
Linux market leader Red Hat (RHAT) announced that it had smashed analyst projections for new enterprise subscriptions and grown quarterly revenue by 43%;
Novell (NOVL), a recent entry into the Linux market, inked a breakthrough deal with Hewlett-Packard (HPQ). The deal put Novell on the radar screen of Linux investors and analysts who, fairly or unfairly, had long ago written the firm off as a maker of legacy software;
The European Union slapped Microsoft (MSFT) with a $612 million fine and other penalties that could ultimately weaken its stranglehold on the operating system market.
After rallying strongly late last week on the news, Red Hat rose another $1.50, or 7.1%, to a 52-week closing high of $23.70 on Monday, while Novell gained 49 cents, or 4.4%, to $11.66. Following some major international "wins" in recent months, last week's developments demonstrated that Linux, not so long ago dismissed as a geeky niche product, is moving further into the mainstream. That's the good news for Linux providers. But by agreeing to sell business desktops with Novell's SUSE Linux installed, H-P has made Red Hat's market that much more competitive. Although the two companies have similar market caps (Red Hat at $4.2 billion, Novell at $4.5 billion), Wall Street has understandably treated them very differently. Red Hat, which has yet to have a $100 million revenue year, is valued at 180 times estimated 2005 earnings, and sports a price-to-book ratio of 10.7. Novell, meanwhile, which annually books more than $1 billion in revenue, trades at 40 times 2005 earnings, and has a price-to-book ratio of 4.4. The difference? Red Hat is nearly synonymous with Linux; Novell is best known as a provider of legacy software. Novell has yet to earn a penny from Linux. Although Novell has delivered numerous new products in the last few years, it still derives about one-third of its revenue from NetWare, a once-dominant network operating system, said analyst Gideon Kory, of Roth Capital Partners. It will take a few quarters for revenue from the H-P deal to start flowing, he said. (Roth Capital has no investment banking relationship with Novell.)