SourceForge: Undervalued Open-Source Stock 13 comments
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SourceForge (LNUX) is a small internet company that had a wild beginning. At the height of the internet bubble, its stock, like fellow Linux stock Red Hat, soared to insanely high values, peaking at over 400 per share. But the company’s current price is too low, and opportunities abound.
The first thing you need to know about the company, now trading around $1.35, is that it is sitting on about a dollar a share in net cash and other hard assets, and has no long-term debt. The second thing is that it has turned a profit for 9 of the past 10 quarters. The third thing is that it owns a number of high-traffic websites, including Slashdot, Linux.com, Unix and Palm software site freshmeat.net, online retailer ThinkGeek.com, and SourceForge.Net, the home page for a large number of open source software projects.
Right now hundreds of millions of dollars are flowing into open source software development. Google subsidizes the Mozilla software suite, which includes the popular FireFox browser, to the tune of more than $50 million a year. Sun Microsystems, which has a huge market cap relative to LNUX and is a potential buyer of LNUX, also heavily subsidizes open-source software development, in particular Open Office, a completely free alternative to Microsoft’s Office suite.
The problem with open source/Linux companies has always been monetizing the popularity of their software, which of course is free. LNUX mainly does so by selling advertising on its group of sites, whose readers tend to be a high-income and hard-to-reach market of software industry professionals and individuals with decision-making authority on technology purchases for their company or organization.
LNUX has also recently unveiled a new revenue stream for Sourceorge.net by streamlining the process by which those who want to customize open-source applications can contract with the software developers.
I see three potential catalysts that can propel LNUX upward. First, LNUX could be purchased by a company looking to expand its open-source software business. The two most obvious buyers are Sun Microsystems (JAVA) and Red Hat (RHT). A partial sale of one of LNUX’s discrete sites is also a possibility. Both JAVA and RHAT are vastly larger than LNUX, making the company a tiny snack to digest. At the current price of about $1.35, and subtracting out the company’s book value (consisting mostly of its cash horde) gives a forward P/E for LNUX of only 7 times 2009 estimates. Thus for these companies a purchase of LNUX would improve their profitability and earnings ratios.
Two, the company could improve its advertising, in particular by signing an exclusive deal with Google and eliminating the expenses it incurs from in-house ad sales. I believe the mere announcement of such a deal would be good for a 20% bump in the company’s shares.
Third, with the stock trading so cheap, especially given LNUX’s big cash pile, simple organic growth and a small increase in profit margins could allow the stock to recover to the price it fetched last year of around $4. The company’s fortunes are tied to those of open-source software, and that future looks bright. Windows Vista has had a very poor reception in the marketplace.
As a long term play, LNUX’s downside is limited by its big pile of cash and consistent if not amazing profitability. Its upside, however, is huge. When Apple was at its nadir five years ago, it traded for under $7 a share. Now it is at $170. Driving much of Apple’s incredible growth has been consumer apathy towards Microsoft products. Just ask any Apple fan what they think of Microsoft, and you will get an earful.
With Vista, we are starting to see this same apathy in enterprise computer buyers, many of which already are using Linux and other open-source software on their servers. I expect Linux’s server market share, already quite high, to increase. As the economy weakens, Linux consumer PC sales may also finally take off. Right now both Dell and on an experimental basis even Wal-Mart see enough potential in this market that they both sell consumer-oriented PCs with versions of Linux pre-installed. These computers are generally much cheaper than Windows PCs, with an especially notable difference at the low end, where MS software licenses can increase the cost of a PC by more than 30%. Linux-powered PCs benefit not only from not having to pay Microsoft licensing fees for Vista and Office, but also not needing the powerful hardware needed to run Microsoft’s clunky, resource-hogging software, which gets worse with each new generation. While the upper-end of the consumer PC market deserts Windows for Apple, the lower end I think will increasingly choose the sleek, easy to use consumer versions of Linux.
Here’s an example of how Vista apathy could benefit SourceForge. A company that has 1000 employees in its call-center might need to replace its computers. Switching to Linux would allow the company to save hundreds of thousands of dollars. First, by not paying for Windows licenses. Second, by being able to buy cheaper computers. Third, because those cheaper computers use less electricity. Fourth, rather than both paying for its call center software and then paying again for the software to be customized to its needs, the company could instead start with free software, and pay developers via SourceForge to provide the necessary customizations. Fifth, the computers will last longer since few viruses and e-mail worms affect Linux, but entire Windows networks can get wiped out without expensive, annoying, and frequently updated anti-virus software.
We are already seeing governments, especially in South America and the EU, make the switch to open-source for all their computers, not just servers. There is simply no other company positioned to capitalize on this trend that is selling at such a cheap ratio to earnings as LNUX.
Companies mentioned: Microsoft (MSFT), Apple (AAPL), SourceForge (LNUX), Sun Microsystems (JAVA), and Red Hat (RHAT).
Disclosure: Author is long LNUX and holds no position in other companies mentioned.
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This article has 13 comments:
"announced the release of an application for the iPhone and iPod Touch that will allow users to easily view and explore the latest news items from the SourceForge web sites. The application, called "SFNetNews," will provide content from Slashdot, SourceForge.net, and freshmeat."
However, while the observation that “it has turned a profit for 9 of the past 10 quarters” is technically correct, it ignores the fact that several of those quarters were profitable by virtue of the fact that the company sold off parts of the business and reported the sales proceeds as income. Specifically, the sales of Animation Factory and SourceForge Enterprise Edition. If you look in detail at the underlying financials you will see that the business is borderline break even. So they are not losing money, but they are not making money either. Track, for example, their cash position over the last 3 years ignoring new capital from any private placement rounds.
It is also true that many people download software from SourceForge.net. However the most popular open source software is not on SourceForge.net. It’s interesting that none of the projects you mention in this article (Linux, Open Office, and Firefox) are hosted on SourceForge.net. SourceForge.net is something of the ghetto of open source, mostly hosting small irrelevant bits of code. SourceForge.net is also commonly used to save hosting costs. A few larger projects really host the project elsewhere but utilize SourceForge’s download bandwidth to save costs.
Turning to your catalysts, why would companies like Sun or Red Hat want SourceForge? Both already have broader reach than SourceForge. Buying SourceForge would not help either “expand its open-source software business” since SourceForge is not in the open source software business. The primary source of revenue (68%) at SourceForge is sales of t-shirts, coffee mugs and other “geek” toys at their e-commerce site ThinkGeek.com. The rest of their revenue comes from advertising. Why would Sun or Red Hat want a retail t-shirt shop? Or a place that does a poor job selling ad banners? SourceForge makes no sense business wise to either.
Next, your idea that SourceForge could improve profitability by signing an exclusive advertising deal with Google is naive and laughable. Google is an extremely poor partner for monetizing ad revenue. They pay very little per ad served on partner sites. If you knew anything about what Google typically pays per ad you would realize that SourceForge advertising revenue would actually drop considerably were they to funnel all of it through Google. The only way to high CPM numbers is direct ad sales (which is why all the top media properties do the bulk of their ad business direct). Remnants go to Google for a couple of dollar CPMs.
Now let’s talk about “simple organic growth”. There has been none here for years. In fact, one could argue that the company has been going the other way for years. That’s why the stock is trading so low; investors have lost faith in the ability of the company to generate any organic growth. They have a history of failing to execute that spans years and is now ingrained in the corporate culture. Nothing indicates that the company can stop its decline and demonstrate any growth.
Your discussion about Microsoft is an interesting but totally irrelevant one. The failure of Vista and corresponding growth at companies like Canonical (Ubuntu Linux) and Apple is totally irrelevant to SourceForge. SourceForge.net has nothing to do with Linux, and the success or failure of Linux has no impact on SourceForge. (Well, I suppose more Linux users might be buying t-shirts at ThinkGeek.)
Bottom line – unless SourceForge makes some dramatic changes in its business the company is going nowhere. At about $1.35 per share it’s probably in the right price range - cash on hand plus a small premium for a handful of decaying web sites. Nothing here indicates that's likely to change in the foreseeable future.
>>here for years. In fact, one could argue that the company has been
>>going the other way for years.
>> Nothing indicates that the company can stop its decline
>>and demonstrate any growth.
SourceForge is the global technology community’s hub for information exchange, open source software distribution and services, and goods for geeks. The network of media and e-commerce web sites serves more than 33 million unique visitors each month from around the world. * Data collected from Google Analytics and Omniture.
SourceForge.net [alone] traffic ranking is #130* (8/3) of [all**] websites neck and neck with c|net (126) which was recently acquired by CBS for $1.8B.
ThinkGeek.com "saw a 29% eCommerce revenue growth in Q3 [2008, ending Jan 31 2008] compared to the third quarter of last year". ***
*www.alexa.com/data/det...
** www.alexa.com/site/ds/...
*** Q2 2008 Conference call and biz.yahoo.com/e/080311...
In general I think the advertising on the SF network of sites seems to be poorly executed. Last time I went to slashdot the only big ad was from Chevron advertising its ethanol program. I think it can do much better at monetizing these high-traffic/quality-r... sites, and at some point probably will.
I am not impressed by your observation that a $50M/year open source project does not use SF.net, clearly at that size they would want their own site, and you are incorrect that there are no good projects there.
The company is fairly valued if it does absolutely nothing new, but I see a lot of potential and little downside. $1.05/share is possible at year end 2009, but I think $2.25 is at least as likely.
ThinkGeek I do think is well executed. E-commerce will continue to grow and take a much bigger bite out of traditional retail. The shutdown of Sharper Image, which sells a lot of the same high-tech gadgets, is also certainly good news.
Huh? How has the fact that the CEO gave up on the company improved matters? Maybe Ali resigned for a reason. Maybe there's no there there. Then we have this BS:
>SourceForge is the global technology community’s hub for
>information exchange, open source software distribution and
>services, and goods for geeks.
Sorry, even Dana Blankenhorn sees the writing on the wall here. From his article today on Essentia and the latest open source company to dump SourceForge.net, JasperSoft:
blogs.zdnet.com/open-s...
>Essentia ate Sourceforge’s lunch and they never even heard the
>dinner bell.
This is a standard trend. Open source companies and projects are moving off SourceForge.net as fast as they can. This is part of the reason the technology advertisers have abandoned advertising there. SourceForge.net's Alexa rankings have been dropping steadily for years. It is now down to #130. Steadily declining Alexa rankings are not a positive for a company that sells ads.
Sorry guys. This is a walking dead company. It has been for years. We didn't even talk about the competition from Google (Google Code). I understand that Google Code now hosts as many open source projects as SourceForge.net and has higher traffic. Why would Google acquire a company they have already beaten in the market?
>Essentia ate Sourceforge’s lunch and they never even heard the
>dinner bell.
essentiaserve.com (host for Jaspersoft) has a traffic ranking of 1,511,055 (v. SourceForge's 130).
source: www.alexa.com/data/det...
>>Huh? How has the fact that the CEO gave up on the company
>>improved matters? Maybe Ali resigned for a reason. Maybe
>>there's no there there.
Ali was fired. Advance approximately 21:10 into the Collins Stewart Growth Conference ir.corp.sourceforge.co... held July 9th in New York.
LW, again, some of what you say is valid concerning SourceForge [prior] to q1 2008 (October 2008) with the hiring of Jonathan Sobel caps.fool.com/Blogs/Vi... and the firing of the CEO on June 10th, 2008.
Reference: caps.fool.com/Blogs/Vi...
>>essentiaserve.... (host for Jaspersoft) has a traffic ranking of
>> 1,511,055 (v. SourceForge's 130).
JasperForge.org has a traffic ranking of 83,774 source: www.alexa.com/data/det... (compare site with sourceforge.net on same this same traffic ranking graph)
I'd buy their stock in a hot second if I thought that someone like RHT might buy them. RHT turned their equally steller IPO and opportunity into a $5B market cap. But RHT is full of people who really get open source, not a a consulting firm that jumped on the badnwagon. And RHT isn't in the content business. And content is all LNUX has to offer.
SourceForge(t) is a parking lot, and a cash/bandwidth hemorrhaging sieve. And they offer a service no one actually needs to exist (certainly not enough to pay for, especially given the declining cost of bandwidth and rising number of feature rich competitors from CollabNet to JasperSoft), but are willing to take advantage of. Slashdot carries the whole shebang and even they don't have the inbound ad revenue they should. Speaking of ad revenue, GOOG doesn't "subsidize" Firefox, they flat out pay them to be the default search tool bar. If you break that down to a cost per user, $.41 per user per year, assuming 120M users, you'll see that GOOG can afford to shit that cash at Firefox forever to get that user base. SUNW knows even less about and has even less success with open source than LNUX, so they'd only ride that torpedo all the way into the ground like Slim Pickens in Dr. Strangelove. Speaking of movies, LNUX reminds me of the line in "Swingers." "You got these claws and fangs and there's this scared little bunny of an opportunity, and you don't know what to do with these claws and fangs..." It's not in LNUX DNA to salvage this situation, and it's not worth it to the most likely suspects to bail them out. For example, RHT shareholders would issue a resounding WTF to buying a user generated news company.
Dump sf.net and sell /. and maybe they're worth looking at, but even then it's a $20M a yr company at best.
If you see the last quarter you can not almost 500k $ in stock based compensation which has conducted to a loss.
It's really unbelivable that a stock option plan has not be linked to a stock price target
On Nov 26 07:42 AM coder wrote:
> Considering that the only sensible and valuable bit which was technically
> leading and leading in the market was SourceForge EE and this has
> been sold to CollabNet - what is left in LNUX is a heap of money.
>
>
> Speculation on SUN taking over LNUX are way off - SUN is deeply involved
> with CollabNet (which is consolidating the two main enterprise focused
> code development solution) as evidenced by the long standing OpenOffice
> and java.net hosting.
>
> If you want to speculate: candidates to take LNUX over could be GE
> or a bank as a measure to decrease their leverage ratio.