OUR TAKE

Red Hat Approaches Black

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	Discussion Boards The Motley Fool Take Red Hat

By Rick Aristotle Munarriz (TMF Edible)
March 26, 2003

There's a little less red in Red Hat (Nasdaq: RHAT) these days. The software maker produced a fourth-quarter loss so small that it rounds off to nil on a per-share basis.

If it weren't for a hit on foreign currency rates, the company would've scored the second profitable quarter in its public history. Of course, the market doesn't applaud nil.

Red Hat also comes with baggage: the unrealized potential of the Linux operating system. Once the thrifty underdog's best challenge to topple Microsoft's (Nasdaq: MSFT) Windows empire, Linux has taught Red Hat that doors sometimes close for open-source software. 

It's been a dozen years since Linus Torvalds created the first version of Linux. Red Hat was quick to take the free operating system with an openly distributed source code, package it, and craft premium add-ons and services to cash in on the movement.

Three years ago, Red Hat traded for more than $100 a share. Today, it's one bad trading day away from dipping below the $5 "no margin" barrier. However, that's more an indication of how much money could be made on the Microsoft antidote than of Red Hat's own performance.

Fourth-quarter revenue grew from last year's $18.6 million to $25.9 million. That's 40% top-line growth, though it's only natural to wonder why folks thought Red Hat was once a $20 billion company.

Linux is doing fine. Red Hat is doing fine. Expectations have just been tempered by something called reality. Microsoft isn't going anywhere. Neither is Apple's (Nasdaq: AAPL) Mac OS, Unix, or the dozens of operating software projects out there. 

So, we can take a more sensible approach to Red Hat than a couple of years ago, when just the phrase "open source" conjured the image of a free operating system spreading around the world in epidemic fashion.

The company is cash rich; its $292 million cash balance backs up nearly a third of its market capitalization, and it has posted positive operating cash flow for three consecutive quarters. But with 170 million shares outstanding, Red Hat needs to take more than baby steps to earn substantial capital gains.

Applying some of the greenery through either share buybacks or tactical acquisitions will help. While its cash cushion may temper the downside, the company will need to come up with new tricks to realize the upside.

We'll see what Red Hat pulls out of its hat. 

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