- Red Hat scored another earnings beat on Monday.
- It rises steadily, falling only briefly during bear markets like the current one.
- Unique for more than open source.
I have a proprietary attitude towards Red Hat (NYSE:RHT). I covered the company for five years. I was a guest at one of their annual conferences in Boston. Their CEO and I are alumni of the same school.
But that can’t keep me from appreciating the company, and it won’t stop me from recommending it as the stock continues to make a steady rise as the company delivered yet another quarter of earnings beat on Monday.
They Sell What You Can Get For Free
Red Hat sells something you can get for free. It’s an open source software company. The business is based on Linux, the open source Unix-like operating system first crafted by Linus Torvalds, who has no direct association with the company. It licenses contracts supporting an “enterprise” version, Red Hat Enterprise Linux.
Red Hat has also built a big middleware business out of JBOSS, a set of middleware tools acquired nearly a decade ago, which took some years to integrate into the business. But the secret sauce of Red Hat is the cloud, specifically OpenStack, a cloud infrastructure system first sponsored by hosting company Rackspace (NYSE:RAX) and now run by an independent foundation.
Under CEO Jim Whitehurst, who has written a good book called The Open Organization about how he runs the company, Red Hat committed itself to OpenStack, and is among the biggest contributors to it. It offers licensed support for its own version of the software, and offers a platform called OpenShift whose purpose is to bring its other products to OpenStack clouds. In addition to that, Red Hat supports Cloud Foundry, a platform of languages and other tools first offered by VMware (NYSE:VMW), which that company made open source a few years ago.
A Steady Beat of Earnings Beats
Red Hat achieved another beat on earnings in its second quarter report yesterday, with net income of $51.39 million, 47 cents per share, and revenue of $504 million. The revenue number was 13% better than a year ago, and everything else rose by about the same rate. It raised guidance for the rest of the year, and now expects revenue of $2.044 billion, including $519 million during the coming quarter.
In past years Red Hat was seen as a stalking horse for IBM’s (NYSE:IBM) ambitions in open source. IBM executives are regular speakers at Red Hat events, and the IBM cloud, acquired through a company called SoftLayer, is run on OpenStack.
The feeling was that, if IBM owned Red Hat, the company’s position as an “honest broker” among open source corporate interests might be compromised. Red Hat is now worth $13 billion, and while IBM is worth $144 billion it’s unlikely it would win the company without a fight that would make it unaffordable.
They're Based Where?
Red Hat is also unique in that it’s based far from Silicon Valley, specifically in Raleigh, NC, where it recently took over a skyscraper that formerly held the area’s main electric utility. It also maintains large offices in Boston and in Atlanta, where JBOSS was based, but Whitehurst notes that many of its people telecommute, working from home all around the world.
Red Hat stock seems fully valued with a Price/Earnings multiple of 71 but it had a similar multiple a year ago when the stock was at $60/share and five years ago when it was at $40. It has not yet reached the extreme heights it had during the dot-com bubble of the late 1990s, a peak of $132/share based on its present share count, but since the bottom of that bubble’s bursting it is up over 800% and continues to move steadily forward.
Red Hat stock is not a highly volatile stock. Its moves tend to be muted. But the recent correction has taken it down from $80 to its present level of $72, and it’s far more likely to return to those heights than not. There’s very little to stop it. No other company has succeeded in open source quite like Red Hat, and no other company is likely to.