I Wouldn't Look Down If I Were You
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When an Internet company announces quarterly earnings that fail to meet analysts' expectations and posts a relatively modest 63 percent in quarterly revenue growth over the previous year, you would expect its stock to take a pounding from the market.
Unless, of course, the company and its stock are floating on that bubble within the Internet bubble: Linux.
Linux, of course, is the free operating system software that some believe (and many hope) will dislodge Microsoft Windows' iron grip on the computer software market. While it's too early to tell if Linux poses a genuine threat to the Redmond giant, the technology clearly possesses the power to scramble the minds of investors.
The latest beneficiary of the Linux-or-leave-it craze is Red Hat Inc. (RHAT). Before the opening of trading Monday, Red Hat released its first quarterly earnings report since going public way back in August (becoming the first Linux company to hit the street).
And it did, but that's about all it was, a pause. After dropping slightly in early trading, shares of RHAT on Monday afternoon were up more than 12 percent to 265 from Friday's closing price of 252-7/8, despite also reporting a 5 cents per share net loss that exceeded consensus estimates of 4 cents per share.
Investors (at least for the moment) are willing to forgive those numbers for two reasons: 1) Red Hat took the opportunity Monday to also announce a 2-for-1 stock split, and 2) hey, it's Linux, isn't it?
Monday's surge gives Red Hat a market capitalization of $17.6 billion. Only 11 other Internet companies are valued higher, and all but one have more revenue than Red Hat. Based on estimated fiscal year 2000 revenues of $25.1 million (taking the three quarters already reported and CEO Matthew Szulik's $12.5 million forecast for Q4), Red Hat is now trading at nearly 700x projected revenue.
If you're a Red Hat employee holding options at the stock's $14 offer price, the market's blind optimism about Linux must be like a holiday dream come true. Sooner or later, though, like a cartoon character who can run on air until he looks down and realizes there's nothing below him, Red Hat investors buying in at the current premium prices will become abruptly reacquainted with gravity.
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