VA Linux: A Case Study In Irrational Exuberance
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
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
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
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
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
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,
Webvan, The Globe.com,
and a host of others have shown now that such thinking is
Success has to be earned, not bought
© 2000 Dare Obasanjo