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So it's a much-discussed pattern, the two-month slide of RHAT. I just installed Red Hat 6.1 on a Sony Vaio laptop today with a friend. It just went in, just like that. You get an option for which install tool you pick, "expert", "text-only", or a very nice window-driven, point-and-click interface like people have been asking for for years. It just loaded and works. Unlike Windows, instead of blowing away the existing install of the competitor's OS, it automatically identifies the other OS and sets the machine up to dual boot. Now that's a friendly neighbor! And it came up running help browsers and with point-and-click icons all over the place. This is a vast improvement to the general user over the offering a year ago, and that in turn was a vast improvement over a year before. For long-term investors, the product is growing by leaps and bounds and over the long term, I expect the stock will, as well.

Regarding the stock, I think the discussion here has been focussed on either the totally big picture or the totally small one. Either people are talking about what a great company Red Hat is or isn't, or what today's price swing means. Clearly the trend has been almost linearly down for the past two months, yet nobody is talking about IPO trends, public/market expectations, or insider selling. When Red Hat and its IPO sponsors evaluated the company, they shot the moon by going outside the estimate of $10-12/share, pricing the IPO at $14. Of course they were wrong, and the stock shot to over $120 very quickly. Hats off to those who sold at that point (so long as they can pull the trick to get back in at the bottom). The Slide began then, with a hiccup yesterday.

My take is this: on speculation and hype ("momentum" in the Words of the Wise), the stock shot up. As it went up, people jumped on to get their piece of a great thing, without really asking "what's it worth". So long as you do all the things a good day trader does to protect your gains (set stop-losses just below your winning positions and keep resetting them so you don't get nailed, watch from minute to minute, etc.), you're in good shape if you buy a rocket without knowing much of the company or what it's worth. But most of us have day jobs.

So, we hit 120 and finally nobody's jumping on anymore. The Slide begins as people give up and jump off over time. We break a "support" level around 75 the other day and some folks buy and the price shoots up. I suspect it's the stop orders of day traders hoping the stock will shoot up again, or closing short positions. Maybe (joy of joys!) it will start rolling. Sure enough, looks like it's on its way down again after today's trading.

The point is, we don't know what this stock is worth, to the broad market, as a long-term investment. The value is still masked behind the value to day traders and short-termers who couldn't tell you why the company doesn't make other colors of hat. This is often true so soon after a hyped IPO.

Are they worth their market cap of $5 billion in 5 years? Or would their original estimate of $14/share, or $1 billion in market cap, be more reasonable? Can their 10-Q one quarter after their IPO tell us anything we'd believe? This is why the Motley Fool Investment Guide says to avoid companies until 2 years after the IPO. Really, estimating any kind of numbers for such a publicly-young company in such uncharted territory as Open Source Software is pretty meaningless. We can look at the reports and hope they keep their financial act together, not be in debt, have growth of various types, etc. But beyond the very basics of avoiding a fiasco, it's really impossible to see from the balance sheet and income statement what the growth prospects are, or how the rest of the market will respond to them.

More numbers examples: if their business is selling software, being a $5 billion company in 5 years is attainable, particularly if the numbers are to be believed on Linux market share growth. If people keep buying the CD. But it's Open Source Software, and even to its supporters, the OSS model is designed to maximize the quality of the software and its utility to the users, not to maximize the profits of its purveyors. So maybe there's a saturation point of CDs that is way below the proprietary software market. Perhaps then support will be the long-term moneymaker, as Stallman suggests in his GNU manifesto (which started the Free Software movement in the first place). In that case, can we reasonably expect Red Hat to be a $5 billion company in 5 years? Maybe, but it's a much tougher hill to climb in service and support than in traditional software sales. What about contracting? Perhaps Red Hat makes Linux a major OS player and keeps it that way, and every maker of PC software wants to do a port. Naturally they look to Red Hat to contract out their port. Red Hat negotiates not an hourly fee but a percentage of the take. Easy $5 billion in 5 years, if they can keep up with the work! Provided Linux continues to take market share from Microsoft.

If this is sounding a lot like my posts from before the IPO, it's because IT'S REALLY NOT THAT LONG SINCE THE IPO! There just hasn't been that much news, folks, except that a bunch of day traders got excited, and that's hardly news as they're an excitable bunch. It's the same company, same product line, same software and services market. Yes, there has been news of a few more partnerships, but that's been happening at a pleasantly steady rate for a while now. Good news. Didn't save Netscape, in the end.

So, I appreciate the critiques of growth numbers and of the 10-Q, but I'd like to hear a little more about the company and market, and a little less "GO SHORT!" "NO GO LONG!" Vote with your wallet and take your rewards when you close your position. In the mean time, let's talk about the long-term prospects of this company from the perspective of a Fool, not a day trader.

Questions: Does anyone live near Research Triangle Park, NC, where Red Hat is headquartered? How about near the new satellite offices in San Francisco and Germany and Japan? What kind of hours are these folks working? Cars in the parking lot on weekends? Any guesses or revelations what their programmers are paid in stock options, and how many are available to be exercised? Turnover rates among their best talent? Are there particular individuals in the company who are the creative genius that sets it off from the other Linux vendors? Are they taking contracts to do ports, and if so from whom and under what kinds of terms? Can someone visit, and find out quietly whether they do all their inside sales and marketing stuff on Linux, or whether they've copped out and used Macs or Windows?
How professional does the place feel? How are you treated as an uninvited visitor?

Looking at the market, does your local computer store have Red Hat 6.1 on its shelves? How about your local bookstore? Lets ask these vendors how it's selling compared to Windows upgrades. How about add-on software for Linux? Is it out there and how is it selling? Let's get an answer, and then find out again in a year. That will let us guage whether the sales growth is from new markets or penetration into the American market. Because I think that for a while yet, the American market is the most willing to pay for the convenience of a CD and the comfort of a brand name on the label. Overseas, they're on the whole a little savvier about saving money, in part by necessity.

My $0.02 on the last set of questions. I live in upstate New York, land of many cows and few people. At the Cornell bookstore, there are 6.1 CDs on the shelves and Corell Word Perfect for Linux, but no other major name offerings of add-on software. There's quite a lot of Windows software, of course. There are no Linux CDs in the local bookstores, though I haven't checked Staples recently. As a partly-technical university, you'd expect Cornell's bookstore to have more copies than a random bookstore away from a technical market. But what's your experience?

--jh--
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