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Finally, Somebody Explains SCO's Stock
Friday, April 09 2004 @ 02:25 AM EDT

Melanie Hollands of IT-Managers Journal has taken on the chore of explaining to financially clueless types like me why stocks like SCO's sometimes go up inexplicably. I know some of you have been wondering and so have I. Given the company's fundamentals and its downwardly spiraling legal position, who is buying the stock and why would they?

Here [PJ: the link no longer resolves in 2010] is the first of what promises to be a series, so she has only just begun. This article looks at some of the legal, if sometimes irrational, reasons why a stock might go up when you'd think it would go down, including how news can affect a stock. Here's a taste from the article:

Well, stocks don't always trade rationally and in a straight line with what the underlying fundamentals would suggest. Over the long term, I believe stocks move rationally, but there are short-term moves that do not seem rational. In the case of SCOX (and Enron, WorldCom, and many others), I believe the primary long-term direction continues to be down. But on the way down, there are short-term 'secondary' moves that are often counter-intuitive to the primary trend.

An important driver for a stock price is that the market tends to be reactive and trade emotionally. For example, it can trade on hope, fear, and greed: hope that 'the worst is over'; fear that the worst is not over; and greed (such as what was driving Yahoo and Amazon a few years ago) that a stock can go up indefinitely.

I always imagined that Wall Street was made up of rational, Type A guys, who maybe had charts and graphs, like you'd see at a race track. I went to a race track years ago, though I don't personally believe in betting, and that's what I saw, lots of old guys with newspapers and charts and lists of what horse liked to run in mud and stats on the last five times the horse raced. There were plenty of dopes who bet on anything, like a horse named for their favorite movie star or something, and then jumped up and down screaming as their pick ran around the track and lost. And then there was the small group I overheard, where a very short guy was telling everyone that a certain horse had to win, because the jockey told him. And it did.

In my imagination, Wall Street was like that, but with suits and a PowerPoint veneer. Yes, the masses might be silly and buy stock on a whim, and we all know there's a group talking to the short guy with the sure thing, but I thought the pros were the guys with the charts and stats. However, now I understand that it's emotion-driven, particularly in the short term. Hope, fear and greed, eh? Maybe next time Ms. Hollands will address what the cold-blooded do to get a stock to do what they want it to do.

If any of you have any urls or facts you think she might find useful, for example events or days when you thought the stock behaved particularly oddly, leave the info as a comment. Maybe she'll read it and find it useful for a future article.

By the way, for those who are interested, Brian Skiba has left Deutche Bank. He's with a "boutique investment bank" now. Here's where he summers, according to his home page, so I guess he's been raking in the dough. I hope the second home McBride dreams of isn't as grand as that one or this legalbeagle stuff may never end. Just last month, Skiba said Red Hat's business was accelerating, reported in an article, "Investors Love Linux: Red Hat Stock Is Red Hot After Upbeat Earnings, Sales Report". As I recall, he rated SCO at $45 because he thought SCO would get to be a tollbooth on the Linux superhighway. Ha.

That leaves Dion Cornett of Decatur Jones, who rates SCO Underperform. So does MorningStar. Is anyone else covering SCO? Well, of course MSN loves SCO. They print that the "Analyst Consensus" is Strong Buy. What consensus? For that matter, what analysts? Just Mr. Skiba? Mr. Cornett rates it Underperform. Hmm. And speaking of money, Microsoft was nice enough to send some business SCO's way, too. That's another thing maybe Ms. Holland can explain. How can analysts be so contrary in their ratings?

Cornett says this about one day's odd upsurge in stock price and why he thinks it might have happened, in the March 29 edition of Decatur Jones' "Open Source Wall Street":

For the week, SCOX shares traded down to as low $7.57 Thursday before surging late in the day Friday to close at $8.82. The appreciation was unexpected given that the only SCOX specific news that day was an IDG story quoting the EV1 CEO of regretting his licensing agreement, a definite negative as SCOX attempts to sign up additional SCOSource licensees. We suspect the increase in share price may have been driven by short covering given the stock’s performance for the year or possibly some investors willing to hedge their Linux bets with a potential SCOX jury victory. As we have detailed in prior reports, we note that even an outright win by SCOX may only at most generate a one-time $200 million or $10 per share cash windfall for SCOX. This hypothetical $10 per share plus the value of operations is not much greater than the current share price given the rapidly declining value of the core business.

Cornett speaks about the recent wave of MS anti-Linux ads in the April 5 edition of "Open Source Wall Street", and he says this:

Finally, we have observed increased anti-Linux advertising by MSFT. The typical ad, such as the one found last week in the middle of an InformationWeek cover story on MSFT and Linux, claims that Linux is 10 times more expensive to run then Windows Server 2003. However, in making the comparison, Windows is running on an inexpensive Intel platform, costing a few thousand dollars at most, and Linux is evaluated for cost while running on a 4000 pound IBM mainframe. We believe such advertising, which was audited by the META group, is deceptive and is tacit acknowledgement of Linux’s better price performance.

He writes about the Sun-Microsoft deal too:

Last week Sun Microsystems (SUNW: not rated) and Microsoft Corporation (MSFT: not rated) announced a settlement to pending litigation and signed a 10-year technology sharing agreement. We believe the sudden cooperation between long-time rivals was in part driven by the common threat of Open Source software. Yet, despite fears that the agreement could form a patent portfolio roadblock or shift momentum back toward SUNW and MSFT’s proprietary technology, we believe that the agreement will have minor impact on Open Source adoption; (1) the world’s most patented company, IBM Corporation (IBM: not rated) is positioned on the side of the Linux and the threat of retaliation may deter a patent war against Linux; (2) regulators are unlikely to allow SUNW and MSFT to share information, to the detriment of the industry, without sharing interfaces, API’s and other software internals broadly; (3) the IT community has proven the ability to defend against overly-broad patents as was the case with the Eolas patent; and (4) IT customers are unlikely to adopt solutions that result in stringent vendor lock-in as they increasingly express interest in 'choice'.

Furthermore, the agreement does little to change the competitive landscape for Linux. MSFT is not planning on porting Windows over to SUNW’s proprietary SPARC microprocessor architecture, thus the SPARC OS options will remain only Solaris and Linux. Incidentally, we believe MSFT’s lack of interest in SPARC supports our previously expressed skepticism despite SUNW’s $4 billion commitment to developing the next version of SPARC called 'Rock'. In the x86 server market, SUNW certification of Windows provides little differentiation and 'Solaris on x86', is not working. Solaris on x86 is probably 9 to 12 months from practicality according to our industry checks as it does not support hyper-threading, or 64-bit microprocessors, and the performance is reportedly poor. Thus, Linux will remain a favorite choice for x86 boxes replacing UNIX systems.

SUNW’s announced expected revenue shortfall is due in part to the success of Linux. Last week Hewlett Packard (HPQ: noted rated) executives boasted that early results of their newly announced Sun Eclipse program to migrate users from Solaris to Linux were 'encouraging'. Previously, IBM had offered a 60% discount to VAR’s selling Linux products many of which may overlap with Sun’s Solaris channel.

Fortunately for SUNW, the company does have some positive Linux exposure. We continue to receive evidence of SUNW winning small Open Office-driven desktop deals such as a potential 600 unit deal last week. While SUNW’s Open Source revenue is negligible, the Linux desktop, along with possibly Open Source Java, may be areas where SUNW can preserve shareholder value. However, SUNW has hinted that they see Linux as a stepping stone from Windows to running Solaris on desktops suggesting that SUNW still does not understand the market dynamics negative given Open Source adoption.

Amen, brother.

There is a bit from Sun from Rick Ross, founder of Javalobby:

Notably, Sun V.P. Rich Green, with whom I worked closely to prove to Judge Motz in the courtroom that Microsoft had gravely damaged Java and Java developers, is leaving Sun after 14 years there. Rich's resignation was the first significant news to emerge following last Friday's public relations event where Steve Ballmer and Scott McNealy smiled and laughed, shook hands and reminded us all that they have been great personal friends ever since growing up together. There's some doubt about the circumstances of Rich's departure. It was first reported in The Register, which said he was quitting Sun in 'disgust.' Sun's people got hold of the story and quickly re-spun it to be just 'coincidental timing.' I don't know which angle, if either, is closer to the truth.

Rich has been a tireless champion of the Java values and vision most of us share in the developer community. In my opinion he was the best friend the developer community had inside Sun, so I am genuinely sad to see him leaving. It makes me respond to the news of the Sun/Microsoft settlement with fear and apprehension. None among us knows what Rich knows, but we can be sure he knows more about the entire matter than we do, and he has decided that now is the right time to be somewhere other than at Sun. Despite the best efforts of Sun's PR team to minimize the event, I cannot see Rich's exit as an unrelated or inconsequential occurrence. Sun's principal Java leader and champion has left the company on the heels of the Microsoft settlement announcement. On the surface, at least, it would appear to speak volumes.


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