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Is Linux making Sun see Red?
Stock prices reflect mass consensus of where the economy – macro or micro – is heading. Silicon Valley watchers woke to discover that the market capitalization of Sun and Linux vendor Red Hat were about equal. Though matched market caps are not meaningful in and of themselves, the trend lines that have brought parties to parity caused more than a few folks to portend the a new dawn (and no, I refuse to make the obligatory ‘Setting Sun’ joke).
People invest in businesses from which they expect a return, and when the mass consensus – the wisdom of the crowd if you will – drops your share price to liquidation-level expectations, you may indeed be facing a corporate dirt nap.
The market is largely on fat software/support margins. I bet the same way. Software it wonderfully portable (any Internet connection), well differentiated (even among Linux distributions) and has fat margins. Hardware is not as portable (though stock in UPS is a good play), increasingly commoditized (x86/64 servers abound) and thus has crumbling margins. To make real money in hardware these days, you have to ship a lot of iron.
But investors also buy and sell faith in execution. Businesses with clear, narrow and well executed market focus tend to do well. Diversification is OK, but within the context of serving one or two markets. Red Hat is very focused on enterprise Linux, almost to the extent of ignoring embedded and desktop Linux. Sun is all over the place, trying in one breath to be server company, and Open Source software company, a storage company, and a chip company.
They are actually a schizophrenic company with a 77.4% share price drop in the last 12 months. They are doing worse than most banks and brokerages.
The real measure of what the market thinks about Sun and Red Hat can be found in one pair of numbers – their cash/share and price/share. A price per share well above horded cash shows how much wealth investors believe the company will generate. If the price per share equals the cash per share, then investors see zero value in the company’s operations.
Red Hat’s stock is trading for 3.6 times cash. Sun is selling for cash plus spare change.
| Sun | Red Hat | |
| Market Cap | $2.80B | $2.78B |
| Trailing P/E | N/A | 35.7 |
| Price/sales | 0.2 | 4.32 |
| Profit margin | -9.9% | 13.5% |
| Revenue growth | -7.1% | 22.1% |
| Cash per share | $3.56 | $3.99 |
| Price per share | $3.79 | $14.64 |
What is Red Hat doing well? Turn to the checklist presented in the book In Search of Excellence and you’ll see that Red Hat has covered most, if not all, of the eight items that define and excellent company. Sun has not, but most seriously has forsaken the principle of “sticking to the knitting – staying with the business that you know.” They have moved in too many directions too quickly without any unifying theme based on their expertise. They appear to chase market tangents (storage one day, Open Source databases the next) without creating a singular compelling reason for customers to buy and investors to invest.
For Sun to survive they will need to solidify their holdings into meaningful solution sets that drive some form of unique value which they can monetize (giving away software is not a viable monetization scheme). They need to quit chasing icons and fads and start delivering a real value proposition. They need a brand. Something on which buyers and investors can anchor their hopes and trust. They need a leader who can marshal Sun’s strengths and has the guts to trash its weaknesses. Sun needs a maniac warrior with a Napoleon complex and market blood lust.
Larry Ellison has $10 billion in cash lying around and has occasionally talked about getting into the hardware business. The difference between Sun’s cash- and price-per-share totals $170 million. Larry could snatch up Sun without wincing and get his chief database competitor MySQL as part of the deal. With Sun’s massive multi-threading monster chip, Oracle would have a database server combo that might be unbeatable.
Come-on Larry. The time is right. Get ‘em while they’re down.
