Novell Bear's Rebuttal
by David Forrest ([email protected])

It's rare that I agree almost completely with a fellow Duelist. After reading Louis' bullish take and my bearish take, you almost come away with the feeling that we're both saying that Novell has a window of opportunity to exploit here and that they should post some decent earnings numbers. If this happens, we also both agree that the stock should do reasonably well in the short-term. Where we diverge is in our longer-term look at things.

The extent of Louis' long-term view is his statement about the upside of Novell in the next few years. He writes: Assume Novell grows at the industry's 29% rate from there, and we'd be looking at FY00 earnings of $0.84 and a YPEG fair value over the next two years of about $24. For those whipping out their calculators, that's 37% annualized gain over the next 2.25 years. If that happens, it'll be impressive for sure.

Unfortunately, when I evaluate a stock, I generally look at a 5-year time frame and try and determine if, on an annualized basis, the company can offer me market-beating returns. With a turnaround situation like Novell, it's almost impossible to project cash flows or earnings going out one year, never mind five. So, I look at how potent the company's business is as a whole and how competitive I think they'll be over the long-term. Given that Novell won't touch UNIX anytime soon, and given that the window of opportunity for NetWare 5.0 closes next year, it's baffling to even consider this company as a long-term holding.

Now, your response might be: "That's okay Bogey! I plan on riding this sucker up for the next few quarters and then bailing out just before NT 5.0 gets released." Not to burst any bubbles out there, but I'd hazard a guess that you're not the only one who might be thinking this. Are you smart enough to time it? Will the stock really rise in the short-term as much as you think it will? Are you essentially betting on perfect timing over the next 12 months to get in and out of this stock for maximum gain? You're braver than I with your money.

But, enough posturing. Let's skewer Louis' argument. As I said before, Louis and I agree on several things with Novell, but he does fire off one paragraph that is fairly misleading, though not intentionally:

In July, Microsoft announced it was delaying its second test version of NT 5.0, and analysts don't expect the final product will be launched until late 1999 or possibly even 2000. Given the infamous bugginess of Microsoft's new products, technologists will advise companies to hold off any move to NT 5.0 until 2001.

Microsoft shipped the first beta a few weeks back and has entered development of the second beta version of NT 5.0. According to the article I pointed to in my bear argument, some resellers think that NT 5.0 will be released soon rather than later. Also, to say that technologists won't recommend NT 5.0 until 2001 is just plain wrong and irrelevant. I'll tell you why. Technologists don't dictate the flow of sales, resellers and Microsoft do.

Ya know what will happen? A customer will call Microsoft next year sometime and say "I'm having problems with NT 4.0, can you help me?" The answer will be, "We fixed that in 5.0, you should upgrade." Every reseller in the business will be chomping at the bit to sell 5.0 when it comes out. Microsoft will be marketing the daylights out of it. Karl Hess, VP at SAP has said recently:

Windows NT 5.0 is the most significant operating system release ever for us as developers.

Now, SAP is very close with Microsoft and that may have been a throwaway line, but I'm not reading anything like this from major companies about Novell and NetWare. When 5.0 comes out, and all indications are that it will come out in mid-late 1999, people are going to buy it in force. If there are bugs, people will download the service packs and patches. So, I find Louis' timeframe a bit suspect.

All of this simply goes to say that the window is cracked open, and some fresh air may slip through for a little while reviving the once comatose Novell. Unfortunately, the window closes in 9-12 months and Novell will lapse, once again, into relative obscurity.

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