Well, it's extremely easy to deride Eric Raymond, and to draw sarcastic contrasts between his he-man boasting of "Surprised by Wealth" and today's somewhat less exalted levels of the VA Linux stock price. Not only is it easy, it's also fun, and that's why I do it. But while I was checking out the LNUX ticker to try and calculate ESR's wealth in the absence of the clock (c. $300,000, for what it's worth), I took the opportunity to look through some of the analysis available on the Yahoo finance boards. And what a story it tells ....
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The first point of interest is that not only is it trading below book value (the net value of assets minus liabilities, but at its current share price (US$2.18), VA is trading at a discount to its last announced net cash. Or to put it another way, in principle, you could buy up 100% of VA today, sack the staff, torch the computer hardware, forget about the software, forget about everything other than the balance in the VA bank account and still come away with a profit of 20 cents a share. (Source)
Isn't this an obvious market inefficiency? Well, maybe, but maybe not. It could be that LNUX is just a hated stock, and that there is a real killing to be made here. Lots of companies traded below cash value for extended periods during the 1970s, and corporate raiders like Lord Hanson, Kirk Kerkorian and Kerry Packer made reputations by carrying out exactly that sort of deal. However, there are are a raft of alternative explanations:
So it looks as if VA Linux is safe from raiders for the moment. But what the hell is happening to the Open Source Business Model?
- Has the cash already been spent? The cash per share figure is given as of the 27 Jan 01 SEC filing, and a lot can happen to the cash position of a company with a quarterly loss of $50mn.
- Do the books tell the whole story? While the figure of $2.36 cash per share represents someone's best guess at the net position, there can be all sorts of deferred compensation, vendor financing, long-tailed warranties and other off-balance sheet liabilities which might mean that there could be a number of claims on that cash which senior to those of equity shareholders.
- Is a raid practical? Only 43% of VA Linux is held by insiders these days, so one could potentially gain enough control to break up the company by buying up the entire free float. But to do this would certainly move the price against you, and erase most if not all of that 20 cent profit. Any break-up would need the support of one or more insiders.
The Street certainly doesn't believe in it. These estimates are pretty grisly. The average of analysts' earnings per share (EPS) estimates has been savagely revised down -- 90 days ago, VA was expected to lose 10c a share for this quarter, now the expectation is 30c (Oh dear -- remember that 20c profit?). The consensus view has also changed on whether VA will be profitable by 2002; they now think it won't. Of the 5 analysts who cover the stock, all 5 have "Hold" recommendations, which given the incredible rarity of "Sell" calls, gives us a pretty unambiguous indication of the view of professional financial analysts. OTOH, these analysts have proved pretty disastrously wrong on the way up, so we have no guarantee that they know what they're talking about on the way down.
So, VA's stock price is telling us that Open Source doesn't make money, and the financial analysts are telling us the same thing. What's probably worse is that industry insiders appear to be doing the same thing. Ars Digita albeit now sans Phil Greenspun, used to be in the forefront of open everything. Now they're backing away from that, and future modules for their open e-commerce product will be proprietary software, sold for money.
Not only that, but arguably, the company itself is shying away from the ideas by which Raymond thought he would revolutionise the economy. The latest hope for VA's profitability is to get away from hardware, get away from consulting and to sell copies of the intranet version of Sourceforge. It's hard to see how "Harnessing the Power of Open Source ... Behind Closed Doors", to quote the advertising screed for Sourceforge Onsite is following the Open Source Business Model in anything but name. It's also hard to avoid the suspicion that if it weren't for that pesky GPL, SFOS would be a proprietary product too.
It's not all bleak. As I write, Red Hat and VA are bouncing a bit, on news from the Journal that Linux is gaining market share, albeit that Windows NT is also gaining, so the market for Unix-related services may not be exactly booming. And the worry about how this market share growth is going to turn into profits for the "story stocks" remain.
In a recent interview, Larry Augustin remained upbeat. He still sees the company reaching profitability by October 2002. But whatever the long run prospects for VA, they apparently weren't quite good enough to prevent him selling a cool million and a half worth of stock, three weeks before that very interview.
Next in this series ..... what is the future for the story stocks?