Red Hat Is Red Hot Right Now

In an environment where companies are finding it difficult to survive, there is an exception. Red Hat's (NYSE: RHT  ) stellar numbers from its most recent reporting period make it Wall Street's star performer this quarter. Let's see what's working in favor for Red Hat.

Reasons for the smiles
Red Hat posted a surge of 28% in quarterly revenues over the past year, which drove net income up a whopping 69%. This staggering growth was mainly because of enormous demand for its open-source solutions everywhere, especially in the financial services sector and local, state, and federal governments. Moreover, Red Hat's customers have been looking to modernize their data center infrastructure. This helped in growing revenues and highlighted customer loyalty. High demand for Red Hat's services, low service charges, and excellent reliability drove revenue growth.

A large portion of sales come from the necessary support services like maintaining the open-source software and other security services for which it is primarily known. It also charges for services like training and consulting on the software. By charging lower prices than competitors like Microsoft (Nasdaq: MSFT  ) and BMC Software (Nasdaq: BMC  ) , Red Hat has been able to attract more customers and drive more value from existing customers.

Consider this: Red Hat's 25 largest customers have renewed their contracts for 150% of the previous year's contract value. Also, for the second time in the company's history, its top 30 deals are all above $1 million, including a few which are higher than $5 million.

The company's move into cloud services is where I'm betting big. The world seems to be moving toward cloud-based services. Though not a new phenomenon, these services have the potential to change the way businesses store information.

However, the journey won't be smooth in this segment. Established players like Amazon (Nasdaq: AMZN  ) , IBM (NYSE: IBM  ) and Cisco (Nasdaq: CSCO  ) already own the lion's share of these services. Still, Red Hat is very much capable of pulling out the proverbial rabbit with its innovative approach.

In addition to strong growth, Red Hat has a great balance sheet. The company is sitting on a cash pile of almost $740 million even after making huge investments in marketing and R&D, which it believes is paying off. This hefty cash balance and zero debt in the books can help Red Hat in its future growth easily.

Foolish thought
Red Hat is known for value and innovation and has very strong financials. It is an expert in its field and is growing rapidly as if it is a batch of yeast. The stock has returned 1,000% over the last 10 years, which is mindboggling. Linux-based services have their share of followers, and I don't see any real reason why this following should diminish. Foolish investors should keep an eye on this one.

Navneet Bajaj does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of BMC Software, Cisco Systems, Microsoft, and International Business Machines. Motley Fool newsletter services have recommended buying shares of Cisco Systems, Amazon.com, and Microsoft; and creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (10)

Comments from our Foolish Readers

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  • Report this Comment On October 27, 2011, at 5:14 PM, rhatowner wrote:

    Recheck your numbers for Red Hat returning 1000% in the last 10 years. They are wrong.

    12 years ago I bought 50 shares of Red hat for $84.50. Since that purchase there was a 2:1 split so I now has 100 shares at $42.25/share for a total investment of $4225.

    2 days ago I sold them for $4800 for a total profit of $575. Had then gone up 1000% I'd be a multi-millionaire.

    Please send me the other 4.8 million dollars.

  • Report this Comment On October 27, 2011, at 6:26 PM, readthechart wrote:

    rhatowner recheck your numbers, RTFA, and look at the chart. RH has indeed returned 1000% over the last 10 years. Based on what you said you bought around 3/2010 when it was trading for ~$42. However, 10 years ago (like the article says) in 10/01 the price was ~$4. 1000% of $4 is omg..$40. The stock is currently over $50.

    Of course the article is misleading and neglects to mention 10 years ago was the dot com bust and 9/11, but that is a separate argument.

  • Report this Comment On October 27, 2011, at 6:27 PM, readthechart wrote:

    *bought around 3/2000

  • Report this Comment On November 03, 2011, at 5:59 PM, rhatowner wrote:

    I did RTFA and it is WRONG.

    The adjusted price is incorrect. RHAT does not pay dividends and there has only been one stock split during that timeframe so it is very simple math.

    Here are my REAL numbers. Prices are real prices paid/sold at that point in time.

    08/1999

    Bought 50 shares at $84.50

    Total investment $4225.00

    01/2000

    2 for 1 stock split

    Total investment still $4225.00

    (just 100 shares at $42.25 now)

    10/2011

    Sold 100 shares at $48.00

    So the $4225 investment returned $4800 after

    12 years for a total return of $575.00

    Above I said it would have returned 4.8 million that was wrong. I multipled by 1000 instead of taking 1000%.

    $4225 (initial investment) x 1000% = $42,250

    which is nowhere close to the $4800 actually returned.

    So the artical is in fact wrong.

  • Report this Comment On November 03, 2011, at 6:01 PM, rhatowner wrote:

    Bottom line:

    A $4225 investment in RHAT 12 years ago returned $4800 in 10/2011

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