Will Red Hat Earnings Keep the Stock Climbing?

Red Hat (RHT) will release its quarterly report on Monday, and investors expect the maker of open-source Linux software to keep showing solid growth. Even after the substantial bounce that the stock has experienced in recent months, a boost in Red Hat earnings growth could send shares even higher.

Red Hat has a popular following among both customers and investors, as it has in many ways helped to disrupt the dominant business model in the industry. Early in its history, many were skeptical that the company could actually profit from open-source software, citing the many companies that locked customers into their proprietary platforms in the hopes of compelling repeat business. Yet years later, Red Hat continues to thrive as demand for flexible solutions is greater than ever. Let's take an early look at what's been happening with Red Hat over the past quarter and what we're likely to see in its report.

Stats on Red Hat

Source: Yahoo! Finance.

What's in store for Red Hat earnings this quarter?
Analysts haven't budged on their views about Red Hat earnings in recent months, keeping their projections steady not just for the August quarter but for their long-range projections all the way out to fiscal 2015. The stock, though, has climbed substantially, rising 15% since mid-June.

Red Hat's May-quarter earnings showed some encouraging signs of potentially accelerating growth. Overall revenue climbed 15% for the quarter, as growth in subscription-based revenue helped to validate the company's software-as-a-service business model. Lower government spending due to sequestration-related budget cuts held Red Hat back, but CFO Charlie Peters said he thought federal-government business would improve in the August quarter.

In pursuit of further growth, Red Hat has moved into all the latest computing fads. Its open-source cloud-computing initiatives have followed a large group of competitors into the cloud space, and it has also developed a data-analytics and management platform that matches up with what other companies are doing with the big data movement. As with its other forays, Red Hat emphasizes the value of open-source software to distinguish it from its rivals.

The beauty of Red Hat's business model is that it can produce optimized software for a wide variety of different applications, effectively riding the coattails of their success. For instance, earlier this month, Red Hat said that its Enterprise Linux product delivered top performance with SAP's (SAP 0.59%) Sybase big-data platforms, reaching out to existing SAP customers.

Still, Red Hat faces its share of competition. In the middleware space, IBM (IBM -1.05%) continues to lead the industry, with its WebSphere fighting Red Hat's JBoss platform. Even though Red Hat's offerings often have substantial cost advantages, IBM's reputation still leads many customers to choose WebSphere over potentially cheaper alternatives. Numerous rivals in cloud computing and operating-system software also present constant challenges.

In the Red Hat earnings report, watch to see whether the company will make an even larger foray into cloud-based infrastructure. With its recent poaching of a top executive from VMware, Red Hat hopes both to help its biggest cloud-based products grow faster as well as potentially competing against VMware and other companies in storage systems and data-management tools. If it can get an edge in those areas, Red Hat could set the stage for even faster growth ahead.

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