Analysis: Will Lindows IPO start the pendulum swinging back for IT?

A recent news item: Lindows, Inc. announces that it wants to make an initial public offering (IPO) of its stock on NASDAQ. Might this signal the end of the four-year slump in IPOs that’s still dogging the IT industry?

You have to go way back into the dark ages — in Internet time, of course — to find the last time a Linux company actually went public. It was VA Linux Systems (now VA Software, the parent company of the Open Source Development Network, of which NewsForge is a part) in late 2000. VA Linux Systems saw its stock price rise to about five times its initial public offering price in its first trading day, giving it the biggest one-day gain in IPO history.

Times are a bit different now.

Lindows still a startup

Lindows, a 3-year-old Linux desktop distribution specialist which only last week changed the name of its product to Linspire to avoid the continued litigatory wrath of Microsoft, is really still a startup. The company reported a 2003 net loss of $4.1 million on revenue of $2.1 million, up from a loss of $6.7 million and revenue of $63,131 in 2002. The company plans to use the ticket symbol LINE on NASDAQ. No date has been set for the actual IPO, and the Lindows people can’t saying anything due to the SEC-mandated quiet period all pre-IPO companies have to endure.

The consensus opinion of the industry and investment analysts we spoke to was that Linux is the hottest thing in software right now, and has been for a while, so there are lots of potential investors waiting in the wings. That likely means Lindows stock will be super hot the first day or two it trades; the price will spike up quickly before gradually fading back over the course of months.

“It’s a much better market all around than it was a year ago,” said longtime IT stock analyst Melanie Hollands, who writes regularly for OSDN. “And there is a lot of pent-up demand for primary product (i.e., IPOs) from both buyers and sellers. There also have been few technology IPOs the last four years (SigmaTel and Mindspeed are two recent ones). It’s possible the stock price will tail off sooner than people think if it lifts too much immediately after the IPO. The higher a stock lifts after an IPO, the more likely it tails off again.”

Don’t expect this to start a trend

My industry and stock market sources tell me not to look at the Lindows IPO as the beginning of a trend. Google — one of the world’s best-known Linux users — is also expected to go public at some point this year, and that certainly will be a major IT business event, but no one is calling that a trend-setting event either. Lindows’ leap into the public ranks is not a move that will trigger a lot more of the same.

The market is still jittery, even with some economic indicators (low interest rates, slowly improving employment numbers) on the way up. Lindows is a relatively small offering, and one small San Diego company’s public offering does not a trend make.

“There is clearly demand for new issues, but I’m not sure how long the staying power the stock of a company like Lindows might be,” Hollands said. “The long-term outlook for Linux and investors wanting to get in on the ground floor. Lindows, the company — Michael (Robertson, CEO) — has good vision. But I just don’t really see Lindows getting much actual traction. Yes, they have had some good play in the press. But is there really more meat on the bone? I hope so for the sake of Linux on the desktop, but I doubt the product will get more traction in the near term.”

Lindows, as it had better be, is realistic about the challenges it faces. Not only does Microsoft still own 93 percent of the desktop operating system market, Red Hat and Novell own most of the enterprise desktop Linux market. Apple has its 4 percent. Sun is pressing hard with its Java Desktop System, which is really another Linux desktop. And there’s the small matter of a couple hundred other Linux distros to fight through to gain what’s left of market share.

“Our primary competitor, Microsoft Corp., has significantly more financial, operational, and sales and marketing resources than we do,” Lindows said in its IPO filing. “We also will likely face intense competition from other established operating system developers, including Red Hat, Novell, Sun Microsystems, and Apple, among others.”

Um, yeah.

Lindows believes it can undercut all competitors in price. But it takes a lot more than just a low price to convince millions of potential users that an operating system is trustworthy, secure, and stable.

In the meantime, Lindows can expect to enjoy a hot ride out of the gate when it goes public. Whether it can race with the big guys for a long time remains to be seen.