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VA Linux: A Case Study In Irrational Exuberance

By Carnage4Life in Op-Ed
Sun Nov 12, 2000 at 07:21:43 PM EST
Tags: Hardware (all tags)
Hardware

I have been following VA Linux's stock for the last few months, occurences during the past month have motivated me to write an article about it. VA Linux opened to the highest opening price ever of any stock in the history of the stock market. It jumped almost 700 per cent in its first day day of trading and reached highs of over $320 a share during that day before settling at $239. Currently the stock trades at less than $14.50

VA Linux has thus become the poster child for what Alan Greenspan called irrational exuberance, characterized by unreasonable valuations of publicly listed company's with little concern for their long term investment value, which has plagued the stock market (NASDAQ especially) in recent years most notably mid-1999 to mid-2000


Why So High?

The VA Linux IPO occured at the zenith of the stock market's infatuation with IPOs and was blessed by a unique set of circumstances.

    The Microsoft trial was near conclusion and it was clear that Microsoft was going to lose and investors were looking for the Microsoft's replacement and settled upon all things Linux.
    The judicious use of the stock market ticker LNUX fooled some investors into believing that they were the Linux company which made the OS that had been touted as the David to Microsoft's Goliath.
    Various funds who got in on the pre-IPO stock were obliged to run up the stock after it opened as had become customary with hot IPO issues. More discussion on this can be found at Salon.
Why So Low?

VA Linux is an example of a company in a market that has low barrier to entry, investment guides and Economics textbooks all over the world advise against expecting much from companies in these kinds of business sector because they face too much competition to ever become very valuable.

VA Linux simply sells servers with Linux pre-installed (and owns a bunch of money-losing websites). Due to the fact that Linux is free of licensing costs as well as Open Source there was nothing stopping a company with more resources and a more developed distribution channel from entering VA Linux's market once it was proven that the market for Linux servers existed.

Once Dell, Compaq, IBM, etc began selling Linux servers and leveraged their existing sales and service infrastructure it became less clear exactly what made VA Linux so special as to gain such an immense valuation. The current rash of insider selling indicates that most of the corporate and private investors feel the same way.

Also the recent downturn in dotcomm shares has been the most recent source of setbacks as dotcomms were a major customer of VA Linux.

Postscript

VA Linux shows to what degree the New Economy has abused the IPO process. In the past, IPOs were used by medium-sized/large companies that were moderately successful to raise cash to expand into larger, more successful businesses. The IPO market when VA Linux IPOed was grossly transformed from its original purpose, into a means of giving cash to unproven businesses with no long term prospects with the hope that they could buy success. DrKoop.com, CDNow.com, Webvan, The Globe.com, Pets.com and a host of others have shown now that such thinking is erroneous.

Success has to be earned, not bought

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Poll
Which of the following compaies do you think will still be around in10 years without being a subsidiary of some corporation?
o Priceline 0%
o VA Linux 2%
o Yahoo 15%
o Amazon 9%
o eBay 9%
o Redhat 4%
o Microsoft 59%

Votes: 93
Results | Other Polls

Related Links
o less than $14.50
o Salon
o rash of insider selling
o DrKoop.com
o CDNow.com
o Webvan
o The Globe.com
o Pets.com
o Also by Carnage4Life


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VA Linux: A Case Study In Irrational Exuberance | 16 comments (15 topical, 1 editorial, 0 hidden)
Probably several will survive... (4.00 / 5) (#1)
by General_Corto on Sun Nov 12, 2000 at 05:24:32 PM EST

... but I can't choose more than one! :/

I have a strange feeling that Microsoft will become the first western zaibatsu in history; at least, the first one which will be well known purely for services (you could argue that there are already several, such as GE or P&G, but they are more involved with physical products - M$ is more interested in virtual products).

Yahoo will probably survive, if only because it has enough momentum at this point to ride out the current .malaise that we are currently seeing.


I'm spying on... you!
And (2.00 / 5) (#4)
by titus-g on Sun Nov 12, 2000 at 06:40:55 PM EST

AOL of course, like the saying goes, 'it takes 10 men on the ground to keep one guy with his head in the air' (where from?). They've bought theirs.

Most of the dotcom co's

Um ok dunno what I was going to say there, suspect it was much on the lines of 'more ideas than sense' I went through the whole business start up thing when it was still done the old way, you don't do what you can't afford to pay later, you have to have solid ground.


I know the money they spend just goes around, comes around, isn't lost and maybe helps, but really it pissses me of how much is just wasted on business plans that given 5 minutes though would be chucked in a bin.

(me lost the plot somewhere methinks, stopped to watch TV)

--"Essentially madness is like charity, it begins at home" --
[ Parent ]

Zaibatsu? (none / 0) (#14)
by molo on Mon Nov 13, 2000 at 11:45:53 AM EST

Ok, forgive my ignorance, but what exactly is a zaibatsu? It sounds Japanese, and its context makes me think 'big conglomerate' but I'm not sure. Any takers? Thanks.

--
Whenever you walk by a computer and see someone using pico, be kind. Pause for a second and remind yourself that: "There, but for the grace of God, go I." -- Harley Hahn
[ Parent ]
VA's okay (3.33 / 6) (#3)
by Dacta on Sun Nov 12, 2000 at 06:26:19 PM EST

VA's price went to stupid levels, mostly because of hype. That's true.

I think they are a pretty reasonable investment, all the same. They have a money making business, a good brand name, good partners and good people working for them.

While it is true that the computer manufacturing business has low barriers to entry, don't forget that arguement applies equally well to Dell, Gateway and Compaq, all of which have built multi-billion dollar business around it.

There is a large market for cheap (compared to Suns, not to corner-store PCs), reliable linux servers - especially ones with good after market support.

VA doesn't have the market to themselves, but they do have a head start.

Don't forget that VA Linux exceeded their predictions for money made last financial year. They didn't make money, but they didn't lose that much, either.

As for the "money losing websites": think of them as an investment in developer relations. Do you think Microsoft makes money off msdn.microsoft.com? Or IBM off DeveloperWorks.ibm.com? Why should Sourceforge, Slashdot or their other sites be any different?

Disclaimer: I don't own any VA stock, although it is possible that managed funds I have money in do.



Nope, they are loosing dough (4.00 / 5) (#6)
by Philipp on Sun Nov 12, 2000 at 06:53:40 PM EST

I disagree. They do not have a money making business, unless you think that a profit margin of -74.6% is competetive. Their hardware business will never generate riches and all the web sites they collected (Slashdot, Sourceforge, ...), may never be profitable. Sure, they employ some open source heroes, but these guys do not generate any revenue and probably jump ship when they are forced to do things that they don't want to.

Disclaimer: I do not own any stock at all, I am a poor student

alias kn 'killall -9 netscape-communicator'
[ Parent ]

Web site profitability? (3.50 / 2) (#8)
by rusty on Sun Nov 12, 2000 at 08:26:20 PM EST

Slashdot, I have almost no doubt, is profitable. They make insane amounts of ad money from it, and it doesn't cost all that much to run.

Now, the rest of the OSDN sites, with the possible exception of Freshmeat, are definitely losing money. This is a problem, if you worry about profitability.

I also would consider exempting Sourceforge from the "liability" column. It is good for VA's core business, since it generates free software for them to potentially load onto their machines. I don't know if it adds value though, considering you have to weigh what it costs them vs. what the software makes them. Right now, it's probably losing money. That has some chance of turning around eventually though, I think, which is not true for most of their "media properties".

____
Not the real rusty
[ Parent ]

Ad revenue (4.00 / 1) (#11)
by jeffmonks on Mon Nov 13, 2000 at 12:50:30 AM EST

Have a closer look at Slashdot's ads sometime... A fairly high percentage are ads for other VA properties, so there's no real money coming in from those particular ads (they have value on VA's bottom line, but it's not actual revenue).

Slashdot also has a pretty large staff, but I'm not sure how many are full-time paid employees. Then there's the huge expense of all that bandwidth they use.

In other words, I'd be inclined to say that if Slashdot is profitable, it's by a razor-thin margin. That's not a knock on /., just an acknowledgment of how hard it is to make money solely from banner ads.

[ Parent ]

expensive (none / 0) (#12)
by rusty on Mon Nov 13, 2000 at 06:40:21 AM EST

OSDN could sell 100% of Slashdot's pages with no trouble at all. As it is they charge outlandish CPM's for /., and people still pay it. I think the OSDN network ads are more of an attempt to get some of that traffic spread out to other network sites, which are probably paid for by the high price of /. advertising.

It's hard to support a site on banners, though. Slashdot is an outlier on the graph-- most sites are below costs.

____
Not the real rusty
[ Parent ]

Numbers? (none / 0) (#13)
by Philipp on Mon Nov 13, 2000 at 07:49:14 AM EST

Do you have numbers for their ad CPM? Should not be too hard to make the math based on them... Rob makes sth around $100k/year, I guess their salary costs are around $500k, no idea about office rent, bandwith and hardware. Of course you are right about Slashdot being exceptional. I'm sceptical about their growth potential, though.

alias kn 'killall -9 netscape-communicator'
[ Parent ]
CPM Rates and how much slashdot is worth. (4.00 / 1) (#15)
by vastor on Wed Nov 15, 2000 at 07:29:55 PM EST

Here is the andover.net rate card which seems to have a best price of $42CPM by getting huge amounts over a long period while $70 is the top price for regular banner ads (having to buy 100,000 at a time probably knocks all but fairly big buyers out anyway).

Even $42CPM is well above industry average (which I'd guess to be about $5CPM though I'm having a hard time finding any more figures quickly).

But if slashdot costs $840k pa to run (just to keep things simple) then they'd only need to sell 20 mil paying ads a year to raise that kind of revenue.

As linux/whatever continues to grow and more people come on the internet then slashdots audience will probably grow (numerically anyway, it might end up slowly losing market share as people switch to alternatives like k5 for their more in depth discussions but unless they do something wrong they're well positioned to remain a very high profile site). Sure lots of people don't bother reading the comments anymore (I know I don't 99% of the time) but plenty no doubt still stop by to check out the front page periodically.

The only actual figures for slashdot I could find was this brief bit about when slashdot joined the andover.net stable. If they were getting 1mil unique visitors a month back in June 1999 they're probably double that by now so could be displaying 20 mil banner ads a month.

Going with that guestimation, if slashdot could sell the 20mil a month they could be taking $10m in revenue a year (but I doubt they could sell that many at such a high price... but all the regular disclaimers apply about not being an expert in this field :-). $1-2 million a year is probably a more realistic guestimation of their ad sales worth/potential (though I'm pulling numbers out of the air based on 16 month old data and guesses so could be quite wrong).

[ Parent ]

More accurate figures/followup (4.00 / 1) (#16)
by vastor on Wed Nov 15, 2000 at 07:57:35 PM EST

Well here are the actual figures from http://www.osdn.com/advertise/ad_sites.shtml - 28.9 mil pages shown in May 2000.

A slightly more accurate and current rate card is here also http://www.osdn.com/advertise/ad_rates.shtml

If the 60 mil page views mentioned at http://www.andover.net/press_33.html raised $2.8mil then slashdot is probably entitled to about half of that ($1.4mil).

Which fits nicely in the middle of my $1-2m guesstimation :-).

Andover reports a loss in that press release but slashdot probably doesn't supply half the costs even if it supplies half the revenue (given how many projects andover/OSDN has running it could be more like a quarter of the costs, possibly less). So if it cost $4.4mil to run the quarter reported, slashdot could have raised $1.4m and might have cost $1.1m for a $300k profit. But once again I've drifted into the realm of making guesses :-).


[ Parent ]
Is Doomsday still coming? (3.80 / 5) (#5)
by Philipp on Sun Nov 12, 2000 at 06:45:21 PM EST

Great article! But to the point: It quite amazing how predictable all this was. Even the people who created all the insane hype at Slashdot during VA's IPO were pretty much agreement that this company is going to hard time to make money. Here we are one year later, and the company is still in the red.

While all mass-audience media joined the internet hype ("10 best internet stocks for you!!!"), all the serious publications were always very sceptical about this. Considering that there is a lot of vested interest in the rise of stock prices, I cannot overcome the feeling that the mass media is either completely ignorant or corrupt.

On the other hand, there are the doomsayers from Itulip, who are predicting an even bigger crash of the stock market. I have been following them now for over a year and I can't help but agreeing.

BTW, the NASDAQ will be at 3000 ... in the year 2010 (IMHO).

alias kn 'killall -9 netscape-communicator'

Related thoughts (4.83 / 6) (#7)
by Simon Kinahan on Sun Nov 12, 2000 at 07:30:41 PM EST

Interestingly synchronous timing. I've been having thoughts along these lines for some time now, and just tonight I was trying to get them into some kind of order to write an article, either for here or elsewhere.

I don't think its just IPOs though. The software industry's relationship to the stockmarket as a whole is pretty bizarre. Manufacturing and services firms that actually need big pieces of physical capital to operate have good reasons to sell themselves to raise the money to buy that capital. Similarly, the stockmarkets have good reason to take such firms and sell of the capital to the highest bidder when they underperform., and employees are typically better off working for suich firms that they would be as independents, as access to such capital makes them more productive.

None of that applies to software though. Firms typically hire computers and buildings, if the firm is split up there's nothing to sell off except the IP, which is typically not worth much without its creators, and employees only really gain access to one another and the firm's IP through being hired. They could typically do the same work at home theyt do at work. Many do. Get rid of the IP laws and the whole edifice is worth nothing. It puzzles me just what software firms think they are selling when they float their companies, and similarly it puzzles me what shareholders think they are buying. Ever heard of a software firm that payed a dividend ? Didn't think so.

From the founder's perspective, the whole IPO process is just a great big get-rich-quick scheme. From an investor's its an exercise in gambling. Raising funds to purchase capital items has nothing to do with it. Seems to me the whole exercise is degenerate case, brought about by the hugely convenient existence of limited liability that separates both investors and managers livelihoods from the actual consequences of their actions.

Simon

If you disagree, post, don't moderate
Goes to show (4.00 / 2) (#9)
by ZanThrax on Sun Nov 12, 2000 at 09:09:28 PM EST

that for most people involved in the market, high stakes gambling is all it really is. While it would be logical for share value to have some bearing on the company's assets and profitability, the only thing that matters is perception. There's almost no publicly traded corporation whose stock value closely relates to the actual reality of the company's worth and economic outlook; software companies and the tech stock ipo craze simply amplified the already distorted nature of the stock market...

Before flying off the handle over the suggestion that your a cocksucker, be sure that you do not, in fact, have a cock in your mouth.
[ Parent ]

Bizarre business (1.00 / 3) (#10)
by Pseudonym on Mon Nov 13, 2000 at 12:10:25 AM EST

Maybe they'd do better if they didn't pull stunts like they did with Netizen?


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VA Linux: A Case Study In Irrational Exuberance | 16 comments (15 topical, 1 editorial, 0 hidden)
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