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Red Hat IPO Rockets


By David Kleinbard
InformationWeek
August 11, 1999 02:41 PM

Shares of Red Hat Inc. (RHAT), the leading seller of Linux-based operating systems, skyrocketed during their first day of trading today. After debuting at $14 -- the high end of its offering range -- Red Hat's stock shot up and closed the day at $52-1/16.

The company's investors are betting that Red Hat's version of the Linux operating system will someday be a viable competitor to Microsoft's Windows NT. Linux, invented by former University of Helsinki student Linus Torvalds, may be downloaded free over the Internet (although it takes an estimated 36 hours over a standard telephone connection). But most corporate users chose to pay for the system and supporting documentation through distributors such as Red Hat.

David Menlow, president of IPO Financial Network in Millburn, N.J., said Red Hat's stock is overpriced at $47 per share, and he expects it to decline substantially over the next two weeks.

"It will be four years before Linux becomes a viable threat to Microsoft," Menlow says. "But that assumes Microsoft will sit and do nothing between now and then. If you bought the stock at 14, it's a great b-u-y; at 47, it's a great b-y-e."

While Linux-based operating systems represented 17% of new license shipments of server operating systems in 1998, many large companies have been reluctant to use Linux because of the lack of long-term technical support. Still, Red Hat has managed to obtain endorsements for its Linux product from several major hardware and software firms. Last March, Red Hat announced that Compaq, IBM, Novell, and Oracle agreed to invest in the company.

Red Hat Linux consists of about 573 Mbytes of code, about 500 Mbytes of which were developed by programmers outside of Red Hat. Those 573 Mbytes of code contain 645 software components developed by thousands of individual programmers, which Red Hat has to assemble and test before it releases a new version of its Linux operating system.

Red Hat investors shouldn't expect to see profits any time soon. The company said in a filing with the Securities and Exchange Commission that it expects to "incur significant losses for the foreseeable future and cannot be certain when or if (the company) will achieve profitability."


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