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Opsware Attracts Opposites

Longs and shorts are having a tug of war with this software stock.

Some stocks tend to polarize investors, and it's looking like



, the data-center software maker formerly known as LoudCloud, is becoming one of them.

Opsware has always generated ambivalent feelings. It was one of the last stragglers into the public markets in the tech boom years, listing on


in March 2001, about a year after the composite index posted its record high. The feeling at the time was that the IPO squeaked through only because of the star power of founder Marc Andreessen.

Renamed Opsware in 2002 after selling part of its business to computer-services giant



, the company has since toiled in a competitive market under the guidance of former Netscape executives who have run the company since its beginnings.

Now, some on Wall Street are starting to feel bullish about Opsware. Its stock, which went public at $6 only to dip to 35 cents during the darker months of 2002, eventually climbed to a record high of $9.98 last November. It has since fallen to $7.66.

The optimism comes out of a growing sense that, after years of losses, Opsware is heading toward a profit, if not this year then next (it's already profitable on a non-GAAP basis).

But for all that, short interest has been building up steadily, a sign that some deep-pocketed investors are betting the stock will drop from here.

According to Nasdaq, 11.6 million Opsware shares were being shorted in March, up from 11.4 million in February. That's equal to 8.36 days of average daily share volume, which means it would take 8.36 days of typical trading to close out those short positions. By contrast, the average ratio for Nasdaq stocks is currently 3.54 days.


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This is where the polarization issue gets interesting. A high short-interest ratio can be a sign a stock will indeed fall further, or it can be a precursor to a short squeeze. It hasn't gone unnoticed that Opsware has $90 million in cash, which could be used as tinder to spark such a squeeze.

The debate over Opsware's outlook has even taken a public turn. After its most recent quarterly earnings report caused stock to drop off, Opsware board member Michael Ovitz bought 100,000 shares between $6.40 and $6.57 a share, bringing his total holdings to 983,000 shares. After only a couple of weeks, that looked like a shrewd move.

But a mere week after Ovitz's gesture, a fund manager attending the company's analyst day hijacked the Q&A period, and handed a letter to management that demanded they take steps to unlock shareholder value (read: sell off the company). A certified copy of the letter was also mailed to the board.

The divided views over Opsware are clearly reflected in the earnings figures: The bulls are more likely to focus on the non-GAAP figures -- which show earnings rising fourfold this year to 12 cents a share and surging further to 29 cents a share next year.

Bears, however, will point to the real bottom line, which shows a loss of 6 cents a share this year, although this was less than a loss of 16 cents a share last year.

Again, on revenue, there is plenty to argue over. Bulls will say that revenue is expected to grow more than 40% this year to between $142 million and $147 million, which is management's official guidance.

Bears will say that the stock is trading at more than 7 times revenue, a rather high valuation.

Then there's something called "non-EDS revenue" -- a metric peculiar to Opsware but probably the most closely watched one. The company even put non-EDS revenue in the headline of its fourth-quarter earnings release, noting it rose 103% in 2006.

Here too, there's fodder for argument: Non-EDS revenue (revenue from companies outside of its biggest customer), grew 50% in the fourth quarter, which was down from 59% in the previous quarter.

On the other hand, EDS accounted for 21% of Opsware's revenue in 2007, which was down from 38% in 2006. A deal signed last year letting Cisco distribute Opsware's software in some of its initiatives is expected to make Opsware even less dependent on a single company for revenue.

So who's likely to win this emerging game of tug of war? Given the fairly high valuation of the stock and some uncertainty about near-term performance, the bears may gain the upper hand in coming months, while also making for a more volatile stock.

But Opsware is starting to make moves, like the recent acquisition of iConclude, and announcing new products and relationships like that with


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, that could have the stock looking a lot stronger by the year's end.

Shorts have been only so successful in pushing down Opsware -- it's always found strong support around $6.50. Unless something happens to break down that support, Opsware is likely to continue on its long, winding road into the black.