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US markets warm to Linux makers over SCO

It was good while it lasted

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Cash Register If you are looking for evidence proving SCO's success in slowing down Linux momentum, you won't find it in the financial markets.

We are nearing the first anniversary of SCO's lawsuit against IBM over the alleged misappropriation of Unix code in Linux. Since March 2003, SCO's shares (SCOX) have rocketed from around $2 per share to more than $13 today. That's a fantastic 52-week gain and proof that a certain class of investors see at least short-term merit in SCO's pursuit of IBM, Red Hat and Linux.

But while SCO has enjoyed a solid run based on the premise of future financial gain, the company's shares have not faired so well against those of the major Linux companies in the past six months. In fact, as the US markets have surged, the gap between SCO shares and those of Red Hat (RHAT) and Novell (NOVL) has narrowed.

Take a look at what has happened to the major players in SCOgate. SCO was once trading well over $20 per share but has since been feeling the hurt of a fairly steady decline. A look over just the last six months makes the drop more clear.

Investors often rush to react to announcements. Seeing a company try to sue a giant such as IBM with a figure over $1 billion attached to its claims is sure to draw attention and spark a need for action. Over time, however, there is a tendency among investors to bring a bit of reality into the picture. The dust dies down and a smidgen of analysis is applied to SCO or any other company's claims.

You'll notice that Novell is benefitting from the very same rash motivation that sent SCO shares higher. The company's purchase of SuSE nudged it up from around $5 per share to $9 on news impact and then even higher to $13.50 per share over the past few weeks. Close watchers of Novell will know what an amazing surge this has been. Novell shares had languished at the $5 mark for many moons.

This three-month chart gives a great picture of how much the SuSE has meant to Novell shareholders. Novell has nearly doubled in the last 90 days. And make note of how much SCO has fallen in that same period.

But like SCO, Novell has a lot of work ahead of it. Novell must prove it can turn the SuSE operation into a revenue generating business.

Looking back at Novell's track record, investors may get a bit nervous. In 2001, Novell made a save the company type of deal by acquiring Cambridge Technology Partners. With their combined might, Novell was meant to become a software and services powerhouse. Bit since the deal closed, Novell has hardly proved itself as a profit making machine. In fact, Novell reported a net loss of $162 million for 2003 on flat revenue.

Betting on Novell for the long-term is a lot like betting on SCO. You have to believe in the promise of future gains.

We would, however, argue that Linux lawsuit or not, Novell's potential for gain surpasses that of SCO. And we believe the market is reacting to this idea.

The surge of Red Hat and Novell shares versus those of SCO is a bet on the Linux business model. SCO may win a large pay out and some revenue from its licensing operation, and we mean operation is the worst sense of the word, but Red Hat and Novell have their futures tied to the strongest operating system around.

All of the major Unix makers appear to have willingly handed Red Hat and Novell the Linux market. The two companies are poised to cash in from a Windows exodus and customers turning in their Unix gear for cheaper kit. This is a business model and not an experiment in litigation for profit.

Yes, Novell may have benefitted from irrational short-term enthusiasm as much as SCO, but you want to bet on the long term. The market is starting to show which way it leans in this debate. And this is bad news for the investors banking on SCO's gamble. ®

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