Top Red Hat IPO sees share price triple

After days of IPO malaise, Wall Street embraced Linux reseller Red Hat's maiden Initial Public Offering (IPO) this morning.
Written by Larry Barrett, Contributor

Red Hat saw its share price triple in early trading as it made its on stock market debut. After pricing at $14 a share, the stock soared up as high as $50 a share in early trading -- a 197 percent jump.

Red Hat, which priced its 6m shares at the top of its price range, is hanging its hat on Red Hat Linux, an open source operating system that allows developers to make suggestions and amendments to the code.

By providing an alternative to the ubiquitous Windows operating system, Red Hat hopes to capture an audience that has long been disappointed with Microsoft's attention to detail and its systemic rigidity.

The company has essentially made its business selling free software with its Red Hat Linux. In regulatory filings, Red Hat said it represented approximately 56 percent of new license shipments of Linux-based server operating systems in 1998, according to International Data Corporation.

Wall Street heavyweight Goldman Sachs will serve as lead underwriter of the 6m-share offering. It was originally priced at $10 to $12 a share, but was bumped to $12 to $14 a share Tuesday. Proceeds from the IPO will be used to provide working capital and for other general corporate purposes, including geographic expansion.

"This is a way to play the growth of Linux and open source software," said Paul Bard, an analyst at Renaissance Capital. "They're plan is to offer service and support for the Linux community and drive traffic and other revenue opportunities."

From a financial perspective, Red Hat's a much safer IPO bet than some of the other Internet and retailing companies that have gone public in the past month.

In the year ended Feb. 28, Red Hat reported a loss of $91,000, or 1 cent a share, on sales of $10.8m. That's up from sales of only $5.1m in 1998.

Red Hat also said its Web site had 265,000 unique visitors and approximately 2.5m page views in March.

In its latest quarter, the company checked in with a loss of $2m, or 9 cents a share, on sales of $2.7m.

Company officials are quick to point out that the best part about its open-source business model is also the most dangerous to its prospects for making money. If the OS fails to gain widespread commercial acceptance, all its best intentions won't mean much to investors.

On the bright side, it's received technological and financial support from the likes of Intel and America Online through Netscape, supporting its platform.

Linux is used more as a server software so Red Hat will be counting on large companies and Internet service providers for the bulk of its clientele.

But before anyone gets too excite about the IPO, keep in mind that Be, which also offers an alternative operating system, was practically laughed off the Street on July 21 when it went public.

Be only managed to pick up 1/16 to 6 1/16 in its debut and that was after lowering its price range from $8 to $10 a share to $6. It's still sitting right at or below its opening price.

Clearly, there's a strong contingent of investors that doesn't believe in upstart operating systems while Microsoft and Sun Microsystems continue to dominate the playing field.

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