Windows 2000 Launch Has Some Looking at Linux Stocks

The recent pullback could well make for a buying opportunity.
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Everybody's talking about Thursday's release of

Microsoft's

(MSFT) - Get Report

Windows 2000 operating system, which stands to be perhaps the most hyped product from the most successful company ever. But some investors are ignoring the impact on Microsoft and monitoring how the release will affect highflying Linux stocks, whose fortunes are tied to the competing operating system.

The Linux stocks have performed impressively since their IPOs last fall, racking up gains in the hundreds of percent. But recent months have mostly brought harder times, as some observers say the Linux stocks have felt increasing pressure as the launch nears. That means in some eyes that Thursday's launch could bring a short-term buying opportunity, at least.

The group includes

VA Linux Systems

(LNUX)

,

Red Hat

(RHAT)

and

Cobalt Networks

(COBT)

, which have been developing the alternative Linux operating system. That system uses an open-end, open-source platform that runs over the Internet, something that could render the desktop model of computing obsolete if it takes hold.

"Fears of Windows 2000 and its effects are priced into the stocks," says Phil Rueppel, an analyst with

Deutsche Bank Alex. Brown

who rates VA Linux a buy and whose firm has done underwriting for the company. "If there's no near-term effect on revenue, then I think there's a chance for a rebound."

Those companies were all the rage when they went public last fall, racking up IPOs that rose hundreds of percent on their first days of trading. But since then, with the exception of Red Hat, the Linux companies have had a hard run of it.

VA Linux, for example, is now trading 50% below its first-day close on Dec. 9, though at 107 15/16, it's still well above its IPO price of 30. Analysts say that the pending launch of Windows 2000 has likely played into pressuring the stocks downward and that the actual launch of Windows 2000 may help, not hurt, the Linux stocks.

That said, these richly valued companies are already priced to perfection, a trait that can come back to haunt a stock in the highly volatile tech sector. And whether or not Web-based computing will take hold is still too far out to call. Currently, it only represents 10% to 15% of the OS market.

"Most people agree that valuations are on the excessive side to begin with, and that the business models are certainly at least questionable," says Paul Saperstone, technology analyst at

John Hancock Funds

, which bought both VA Linux and Red Hat on their IPOs. "Their opportunity is a niche opportunity to begin with. Assuming these guys are wildly successful, they can still only capture 10% of the market that Microsoft thought it was entitled to before the introduction of Linux."

Which means, short term, the Linux companies could be a good trade in the post-Windows 2000 world. But for the long term, they'll have to act like real, hard-fighting businesses to succeed. And unfortunately, they'll be fighting against Microsoft.