cnbcs052

Cobalt Hits It Big on Debut



by Hal Plotkin and Eric Fleming

Experts said appliance-server pioneer Cobalt Networks Inc. {COBT} would make a big splash when it began trading today. But the company’s stock opened at $140 a share this morning, well above its $22 initial pricing.

Goldman Sachs led the offering, with Merrill Lynch and BankAmerica Robertson Stephens signed on as co-managers of the issue.

Mountain View, Calif.-based Cobalt makes appliance servers, machines made to handle specific tasks. General-purpose servers, which are made by larger companies, such as IBM {IBM}, are more cumbersome and costly to set up and maintain.

Cobalt’s Qube and RaQ products offer Web applications such as file-serving, Web-hosting, as well as services such as as e-mail and e-commerce — all those bells and whistles that companies are racing to offer on their Web sites.

Cobalt’s e-mail server, for example, has Internet service providers “jumping up and down,” says Kimball Brown, vice president at Dataquest, based in San Jose, Calif. That’s because ISPs can now buy an inexpensive $999 box off the shelf and get the machine up and running almost immediately, enabling ISPs to expand capacity at a far lower cost than was incurred with previous technologies.

The Cobalt offering comes at a time when market heavyweights such as Compaq Computer Corp. {CPQ} and IBM rule the server market, yet companies are clamoring for cheap, out-of-the-box solutions to their technology needs.

Sales of server appliances that use the Linux operating system, Cobalt’s particular specialty, are expected to grow by about 69 percent a year, representing about 24 percent of the total server-appliance market, or $3.8 billion, by 2003, according to market-research firm Dataquest.

According to estimates compiled by Dataquest, the server-appliance market is projected to grow to about $15.8 billion in 2003 from $2.2 billion in 1999, representing a stunning 64 percent compounded annual growth rate.

But as with most recent IPOs, Cobalt is starting off in the red. For the six months ended July 2, Cobalt posted losses of $8.2 million on revenue of $7.7 million.

And competing with juggernauts such as Dell Computer Corp. {DELL} may be a tall order for Cobalt, analysts say. Companies could eschew Cobalt, looking for end-to-end products as well as service.

“Cobalt Networks is an investment fraught with high risk,” warned Stacey Quandt, an associate analyst at Giga Information Group, based in San Jose, Calif., in a recent report.

Quandt expects the bigger boys to offer global services and support leading the server market. That could still leave room for a niche play such as Cobalt, however.

Yet, investors have ignored the risk of market behemoths trampling the little guy if the prospects for growth were hot enough.

Juniper Networks Inc. {JNPR} had an extremely successful IPO earlier this year, competing in the same market as Cisco Systems Inc. {CSCO}, the undisputed giant in the router business.

JNPR 52-Week Performance Chart

Sycamore Networks Inc. {SCMR} also excelled in its inaugural trading day. The company competes in the fiber-optic equipment market against Lucent Technologies Inc. {LU} and Nortel Networks Corp. {NT}.

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