From AXXel Knutson,
EVP & Director, Institutional Equity Research
Platinum Equities, Inc.
Member NASD & SIPC
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Inc. under revocable license. ¸ 1999 all rights reserved, Axxel Knutson
Linux [pronounced with a short "i" like Lynn-ex] is probably more dangerous to the long-term
outlook of Microsoft than the Justice Department.
It is an "open source" operating system that can be altered to meet the needs of the users and the
basic "kernel" is, importantly, free and can compete directly with Microsoft Windows. Linux is far
from perfect at this writing?in many tests Linux comes up slower in use than Microsoft, it is tricky
to install and it is not as "user friendly" as Windows, but to concentrate on some of its short-term
weaknesses is to be looking at the trees and missing the fact that Bubbles LaRue in all her
magnificence is behind those trees [I could have used "?missing the forest", but Bubbles LaRue is
a hell of a lot better looking than any damn forest] and users may spend a significant amount of
time trying to integrate various components such as security and access under Linux.
The Justice Department Could be Linux' Best Friend
Microsoft's Windows NT (soon to be called Windows 2000) when run on low cost PCs. Costs
about $1,100 for a 10-user license?Linux is free and MSFT might find itself under pressure from this
operating system in time. Assuming MSFT does not embrace it, as I would suggest to Bill. Add to
that the vagaries of the Justice Department's very successful prosecution of MSFT as an
anti-competitive entity and we have the potential for a mix that could very well favor Linux in ways
that we can only guess at this writing.
One could argue that Linux is just a poor man's UNIX system without all the bell and buckets [I
hate whistles] but with the complexity of UNIX. At this point?that would be accurate.
It's not a free ride for Linux?yet.
Open source is therefore a type of software that includes Linux, which is a specific
UNIX-compatible kernel. Included also is Apache server software, the Perl scripting language and
others. . Programmers are drawn to this software because it gives them rights they could not obtain
from Microsoft, rights such as the right to copy the program, the right to re-distribute those copies,
the ability to improve and change the program and the right to view code that is created by others.
The strength is Linux is in its flexibility and that flexibility is at the user and developer level?therein
lays the difference!
HOW IT BEGAN?THE ROOTS
Linus Torvalds began developing Linux in 1991, while he was a student at the University of
Helsinki. Instead of drinking and chasing reindeer, like most Helsinkians, and making obtuse
comments such as "Yah, sure, I'm not as stupid as I look." [I can say that, my grandparents are from
Norway?a totally ignored people?not even good Norwegian jokes], but I digress, Torvalds wanted
to write a new version of UNIX, so he and a group of programmers combined talents and created a
core operating system called Linux. In 1984, Richard Stallman, a researcher at the MIT AI Lab,
started a project
"GNU" to compete with the trend toward proprietary, fee-based software. Why Richard wanted to
do this is unknown to me and now that I think about it, I really don't care why. His belief that
making source code available to anyone who wants it is integral to furthering computer science and
innovation. How nice. So the kernel for the "kernel" has roots at MIT. Linux is a registered
trademark of Linus Torvalds. Linux is developed under the GNU General Public License and its
source code is freely available to everyone. Linux and its assorted distributions are free --
companies and developers may charge money for it as long as the source code remains available.
SOME OF THE PLAYERS
Companies such as RED Hat think that the ability of the customer to install and configure and use
open source software gives real power to the end-user and if RED Hat is capable of embracing the
basic architecture, then the packages that they develop for the end-user will result in demand. That
surely appears to be the case.
Companies that are players in the field are RED Hat, Inc [RHAT-85.94], Cobalt Networks
[COBT-128.12 IPO Friday with a high of $158], Corel Corp. [CORL6.81], Applix, Inc. [APLX-12] who
markets a decision support family of products including an open suite of desktop productivity
software and development tools for accessing,
analyzing and communicating information in real time on various LINUX, UNIX and Windows
platforms, Esoft, Inc. [ESFT-4.81], SuSe [German], Unify Corp [UFNY-30.12], Imprise Corp
[INPR-4.81], Ariel Corp. [ADSP-2.75] Silicon Graphics [SGI-7.31] Caldera Systems [FLDF-6], VA
Linux [private], Penguin Computing [private] and many of the Nasdaq 100 companies. But the
short-term bottom line importance to these companies remains minimal.
Cobalt Networks [Internet or Intranet "in a box"] outshined the introduction of the common stock
of RED Hat on Friday so that give you some indication of the attention that Linux is receiving. The
initial public offering price for the 5,000,000 shares being offered by Cobalt is $22.00 per share. The
offering was managed by Goldman, Sachs & Co., Merrill Lynch & Co., Robertson Stephens and
SoundView Technology Group. We agree with the rationality of that attention. According to the
company, Cobalt Networks, Inc. is a developer of server appliances that enable organizations to
establish an online presence easily, cost effectively, and reliably. Cobalt's product lines-the Cobalt
Qube, Cobalt Cache, Cobalt RaQ, and Cobalt NASRaQ-are used as Internet and Web hosting
server appliances at businesses, Internet Service Providers, and educational institutions.
Cobalt, utilizes a version of Red Hat for its Linux software, for which it pays a license fee. Cobalt
customizes the Red Hat version by eliminating portions of general-purpose source code it deems
unnecessary for a dedicated server appliance, and then customizes the source code to perform with
its hardware.
Cobalt posted a loss of $13.7 million on sales of $13.8 million. That dollar for dollar equivalent in
sales but consider last year when Cobalt posted losses of $6.6 million
on sales of $1.5 million." Don't expect earnings soon?expect volatility in the stock price.
Here is an interesting comment from a user ["adjustman"] who posted the following intuitive
comment in the public domain at Clearstation.com.
"VA Linux is strictly an Intel shop, with all their new pieces being Pentium-III based. They also use
an Intel motherboard (L440GX+). They have a new model, the FullOn 2x2, which is a two-rack-unit
system (about 4 inches high), which has much nicer styling than their earlier units, with five
hot-swap SCSI drive bays. This is some pretty serious hardware, basing at $3608 (one CPU, IDE
drives).
Cobalt's Raq2 is a 1U rackmount. It uses a low-power (in the electrical sense) embedded version of
a MIPS CPU (a la SGI) and only draws 35W (probably a fifth to a tenth of a Pentium-III system).
Interestingly, their new Raq3 uses a "Intel-compatible processor", so probably an AMD K6-3 or
something. They still claim 35W, which I have trouble believing. They also claim 8000 web sites and
7
million hits a day on one machine, which I do believe. The Raq2 uses IDE drives, vs. SCSI for Raq3,
so they are obviously trying to make the Raq3 a lot beefier to compete with VA Linux. A Raq2 is
about $1800, not sure how much the Raq3 is (supposedly it's available, though). You can do a lot of
setup, configuration, and such through the front panel on the Raq.
Which is better? VA Linux can definitely produce more high-powered servers than Cobalt presently
has. They had a quad-Xeon machine a year ago, and the FullOn 2x2 can have two CPUs. It's more
of a conventional server, in a sense. The RaQ are more of an integrated appliance-type server. I
hadn't checked their product line in a few months, so the RaQ3 is a bit of a surprise to me. If you
need hot-swap RAID, Cobalt doesn't seem to have it yet.
Another one to look for (they haven't announced an IPO as far as I know) is Penguin Computing.
They are similar to VA Linux, and their stuff is as good or possibly better. I seem to remember they
beat VA Linux to market with 2U systems with hot-swap RAID (not by much). They also have an
eight-Xeon box
that they OEM'd from NEC. Watch out for them on your IPO radar..."
With kudos to "adjustman."
REDHat reported that its revenues totaled $4.4 million in its second fiscal quarter, which ended on
August31, 1999. This is a 95% increase over revenues of $2.3 million for the
same period a year earlier. The Company had a net loss of $3.1 million, or $0.09 per share, in the
second quarter of fiscal year 2000, compared with net income of $0.1 million, or $0.01 per share, in
the second quarter of fiscal 1999. Had the Company's initial public offering been completed at June
1, 1999, the Company's weighted average common shares outstanding for the three months ended
August 31, 1999 would have been 67,835,538, which would have resulted in a net loss per common
share of $0.05 for such period.
From Corel Corporation
?announced results for its third quarter ended August 31, 1999. Revenues for the third quarter of
fiscal year 1999 were $71.3 million, compared to $71.1 million in the third
quarter of fiscal 1998. Net profit for the quarter was $17.6 million or $0.26 per share fully diluted
($0.17 per share from operations plus $0.09 per share from a non-recurring item), compared to a net
loss of $7.8 million or ($0.13) per share in the same period last year. The total earnings per share of
$0.26 for the quarter is the highest ever reported
in the company's history. Cash at the end of the quarter stood at $23.8 million. All figures are
reported in US currency.
In August, Corel unveiled its distribution of its Linux operating system, Corel© LINUX©, to the
public for the first time. Corel LINUX will be available by the end of 1999 and Corel expects to
deliver its office suite for Linux in early 2000.
WHAT IT IS
ú OpenLinux 2.2 includes: the new Linux 2.2x kernel,KDE 1.1 Desktop (GUI) interface, Glibc 2.1
Library with backward support for libc 5 library-based applications, DHCP Client, PowerQuest
Partitioning (Caldera Edition) and Boot Magic 4.0, Corel WordPerfect 8,Samba support, Caldera
Open Administration System (COAS), NetWare Client including PAM (Pluggable Authentication
Module), BRU backup and restore Utility, StarOffice 5.0 (word processor, spreadsheet, E-mail and
presentation software), Netscape Communicator, DR-DOS 7.02, XFree86 3.3.3 ,Linux Source Code,
Getting Started Guide and PocketDocà fingertip reference guide. OpenLinux 2.2 began shipping in
April 1999.
OUR RECOMMENDATIONS:
RED Hat [RHAT-85.94]?. Buy with the complete understanding that this stock can be very volatile.
Given the level of trading speculation that went into it during August and September, we could
easily build a case for the need to see that speculation spill its guts out on a break of $50. If that
were to occur, our rating would go to "strong buy.' On a long-term basis, we believe that there is
more risk in not owning RED Hat than in owning. Buy it and fasten your seat belts. Not appropriate
for margin accounts and LOL's or LOM's ["Little Old Ladies" and "Little Old Men."
Cobalt [COBT-128.12] There is no easy way to buy this stock. Given the reaction of the market to
this company it is likely that every trader from here to Gary, Indiana is getting ready to buy this
stock on a pullback. Although, we hope that happens, we would like to own this stock in size, it is
our "guess" that the conventional wisdom of "waiting" for the pullback may not materialize.
So here it is: "Buy." And a "Strong Buy" on any break of $80. But you can see by the range, we do
expect violence.
Ariel Corp [ADSP-2.75] Strong Buy. The consolidation of the move off the long-term base of $2-3
has been fully consolidated. The high in August was about $7.56. We expect a test of that number
and we guess that it will be successful.
Inprise Corp [INPR-4.81] exploded on Friday, perhaps in response to the Cobalt reception in the
market. It hit a high of $6.00 and a low for the day at $4.38. In effect, it gave up nearly 100% of the
move. We rate a "Strong Buy."
Unify [UNFY-30.12] with a base at the $14 level, we are not exactly early on this stock. In September
it moved from the base to $26. A minor sideways move and now this move to just over $30. Very
good things are happening at UNFY and we will rate this a "buy."
Esoft, Inc. [ESFT-4.81] a similar kind of move to INPR, above, bounding off the $4.00 level but this
did not go quite as far but it did stick. We rate this a "Strong Buy" and guess that it may have one
minor move just under $4.50 where we would be quite active.
Applix, Inc. [APLX-12] at the end of August, APLX moved from the base of about $8-10 to $24.68].
We believe that move i9s consolidated and we recommend purchase?rating" "Strong Buy."
Corel Corp [CORL-6.81] is not a pure play but it does have a wide range of products that lend
stability. We rate CORL as a "Buy." It has a stable base at the $5.00 level with spikes to the $10
range.
We are not going into detail on these companies at this time. We prefer to take them one at a time
and will be following up. Clients of Platinum Equities, Inc., will, of course, have access to the
reports. Others will likely see most of the reports but perhaps not all and we alert you to that fact.
DISCLAIMER
Investment decisions should not be based solely on our proprietary indicators, which are intended
as an adjunct to your additional analysis. Please accept these comments as market commentary. We
do not intend these comments to replace detailed fundamental analysis. We urge you to
accomplish that additional research via your contacts on the Internet or through a trusted financial
advisor. If you want additional information, we will give it upon your request.
This report has been prepared from original sources and company data we believe to be reliable,
but we make no representation as to its accuracy or completeness. Additional information is
available upon request. This report is published solely for information purposes. It is not to be
construed either as an offer to buy or sell or the solicitation of an offer to buy or sell any security or
the provision of or an offer to provide investment services in any state where such an offer,
solicitation or provision would be illegal. Any opinions expressed herein are statements of our
judgment on this date and are subject to change without notice and we may not update that change
to you. Platinum Equities, Inc., its affiliates and subsidiaries and/or their officers and employees
may from time to time acquire, hold, or sell a position in the securities mentioned herein.
The author of this report, Axxel Knutson, does not invest in any of the securities mentioned in this
report nor does his immediate family unless such securities are included in mutual funds or index
options. Equity investment involves risk of capital loss. We recommend that your portfolio be
diversified by company size, industry group, geographic region and by currency.
It should not be assumed that future selections will be profitable or will equal the performance of
past selections. Securities listed herein illustrate selections made using proprietary indicators know
as VTAR? [Volume Trade Analysis Research?]. These names, VTAR?, Trading Engine?,
tradingengine.com?, Volume Trade Analysis Research?, are servicemarks/trademarks of AXXel
Knutson and are given under revocable license to Platinum Equities, Inc. ¸ 1999, All rights reserved,
Axxel Knutson and Platinum Equities, Inc. Diversify. Got it?
All recommendations and commentary are directed toward sophisticated, aggressive traders who
have significant experience trading in a volatile market and who possess the financial resources to
risk a loss of some or all of their invested funds. Commissions, and if you use margin, interest
charges will lessen any return on investment. VTAR [Volume Trade Analysis Research] centers
around the proprietary analysis of trading volume, price, general fundamental analysis, beta
concerns, group rotation and detailed analysis of risk as it relates to entry and exit points in highly
liquid stocks. Control the risk?the profits will take care of themselves? AXXel Knutson |
