Looking at the Top Tier of Linux Distributions
Impact of the Mandrake-Conectiva Acquisition on the Linux Landscape
Part 1: Comparing Mandrake, Novell, and Red Hat Financials
Mike Angelo -- 6 March 2005 (C) -- Page 2
Comparing Top-Tier Linux Company revenue to market value Ratios
In terms of revenue to market value ratios, Novell seems to be way ahead of the pack in the revenue to market value ratio comparisons. The revenue to market value ratio for Novell's entire business is 0.59. Novell's Linux business (SUSE) and Mandrake-Conectiva come in closely to each other at 0.24 and 0.17, respectively.
But here, Red Hat is way behind everyone at only a 0.06 ratio. Could Red Hat be just a bit overpriced?
(Incidentally, as of 4:00 PM EST on 1 March 2005, Red Hat's (RHAT) price to earnings ratio (P/E) was 56.24 and Novell's (NOVL) P/E was 5.47. Our estimate of Mandrakesoft's P/E is about 28.89 based on 5,312,889 shares of common stock and a per share price of $10.45 as of 4:00 PM EST on 1 March 2005. On the basis of P/E only, Novell and Mandrakesoft appear to be much better buys than Red Hat.)
Speaking of price to earnings ratios, we thought it would be interesting to compare market or company value with the differences in P/E factored out of the comparisons. That's because the measure of market value, market cap, depends on the market price of a company's stock.
In the Linux companies compared here, there is a range of P/Es from 5.47 for Novell to 56.24 for Red Hat. The higher the P/E for a company, the more overpriced the stock of that company is on the bases of revenue. The lower the P/E, the more under priced a stock is on the basis of revenue. Generally, a price to earnings ratio of about 20 is considered neutral -- that is not overpriced and not under-priced.
(Please remember we are not doing an investment recomendation report. We merely are trying to put these top-tier, Linux distribution companies in perspective with each other. P/E suffices for that. For investment purposes, for example, one might want to put more weight on the Price/Earnings to Growth Ratio (PEG).)
The market values of Mandrakesoft, Novell (entire business), and Red Hat shown in Table 2, page 1, are market cap values. And adjusting the market value as expressed by the market cap statistic is an abstraction of sorts. Nevertheless, adjusting the market cap for P/E puts a comparison of several companies in an interesting perspective -- even though it is an abstraction.
Interestingly, the adjusted for P/E market values shown in Table 3, below, do seem to correlate well with the true sizes of the companies as reflected by the number of people they employ -- as shown in Table 5, below, and their revenues as shown in Table 1, page 1.
Face it. It's pretty obvious that Novell is a much larger company than is Red Hat. Yet the market cap of Red Hat, $2.08-billion US, makes Red Hat appear to be a bigger company than Novell with a market cap of $1.97-billion US. Phooey!
Novell with 5,734 employees and revenues of $1.16-billion US appears to be a much larger company than Red Hat -- with 681 employees and revenues of $124-million US.
The numbers we are setting forth here only are for the limited purpose of comparing these three, top-tier, Linux distribution providers. They are not for investment or any other purpose. If you see something here that leads you to believe you might want to buy or sell stock in any of these companies, we strongly suggest that you consult with your financial or investment advisor rather than rely on any information or opinions in this article.
That said and only on the basis of the numbers we have reported, estimated, and crunched here, it appears that Red Hat is overpriced, Novell is under-priced, and Mandrake is about where it ought to be.
Part 1 Summary
Today in Part 1, we have compared how Mandrake-Conectiva, Novell, and Red Hat stack up against each other on several fundamental fiscal measures -- revenues, market values, revenue to market value ratios, price-earning ratios, and employee productivity. Mandrake-Conectiva is smaller on the money measures than are Novell-SUSE and Red Hat. However, Mandrakesoft Linux is a very good GNU-Linux distribution and is very popular.
In an e-mail discussion, Mandrakesoft CEO, François Bancilhon told MozillaQuest Magazine: the Linux market is just starting, we are not in a well established market and many things can happen in a near future, so we're running a marathon, not a 100 meter race. Mandrake-Conectiva is very determined and is in for the long haul.
In Part 2 coming shortly, we will look further into the financials and demographics of Mandrake-Conectiva, Novell, and Red Hat. We also will look at the problems of trying to compare Linux distribution providers. And we will look at where Mandrake-Conectiva, Novell, and Red Hat stand in the consumer, SMB, and enterprise arenas.
In Part 3 the focus will be on the impact of the Mandrakesoft acquisition of Conectiva on the Linux landscape, and how it improves the Linux landscape. We also will look at how Mandrake-Conectiva and Novell plan to grow their businesses. Will they do that by focusing their marketing endeavours on grabbing users from other Linux companies or by migrating people from other operating systems such as Microsoft Windows or Unix?
And then we will look at what's ahead for Mandrake-Conectiva and the Linux landscape. Stay tuned.
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