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Linux a Money Making Investment: Analysts

One the most straightforward ways to potentially profit from the open source movement and specifically the Linux operating system is buying stock in the leading vendors, according to one investment research firm.

A new research report recently published from Equity Research firm, Caris & Company, titled The Best Things in Life are Free? indicates that the research group has high hopes for both Novell and Red Hat .

Provo, Utah-based Novell has been given a BUY rating with a target price of $12 while Raleigh, N.C.-based Red Hat has been given an AVERAGE rating with a $27 price target. Both prices are higher then either stock is currently trading (as of Friday July 2, 2004).

Mark Stahlman Managing Director at Caris & Company and one of the authors of the report believes that the commercial Linux market as a whole will continue to grow, as Linux is now part of the technological "plumbing" of the high growth x86 market.

"Much like the Internet protocol TCP/IP and the general acceptance of x86-based systems, Linux has become a basic building block of this infrastructure, upon which many companies -- both large and small, vendors and customers alike are constructing business strategies," the report states.

In the opinion of the Caris & Company report, the open source code that is the hallmark of the Linux operating systems is a mandatory requirement for some customers though is not a critical aspect across the board.

"While much has been made about the 'Open Source' aspect of Linux, we do not believe that most commercial customers really care that the source code is public nor do they intent to customize their Linux installs," the report said.

Another one of the common refrains about Linux is that it is growing at the expense of UNIX, a claim that Caris & Company attributes more to the rapid growth of the x86 hardware base.

"So, the commonly cited 'statistic' that Linux is taking 'share' from UNIX is among other things, simply a reflection of the fact that UNIX has been unavailable on x86 servers and that these boxes have dominated the volume of servers sold over the past three-plus years."

The report also sees the commercialization of Linux as a two horse race between Red Hat and Novell, though it acknowledges that the majority of current Linux installations are non-commercial. That said, revenue growth for the two vendors is expected to be significant. The nature of the Linux market itself will in Caris & Company's opinion, "that no vendor will be able to gain effective pricing power."

The company with the most to gain from Linux in the Caris view is Novell, as they believe that the company is not currently being valued for what it does.

"We believe that Novell is being valued as a broken company with ancient pre-Internet network technology," the report states. "Whereas we believe that this is really a new company with substantial next generation technology assets and a ready to buy installed base."

Novell has certainly had a big Linux year with its full embrace of the open source upstart and its acquisitions of SUSE Linux and Ximian. In its recently report second quarter revenues rose and its net loss was cut in half from the previous year.

Red Hat has also had a tremendous year, increasing both its subscription and revenue dramatically, though the recent departure of their CFO sparked a sell off in the stock in June ahead of its second quarter earning report.

Linux nemesis SCO Group on the other hand, reported a net loss of $15 million for its second quarter with revenues that were about 52 percent lower than the same time last year. The investment firm still regarded the Lindon, Utah-based company a "possible disruption."