It's extremely difficult to turn in a better financial performance than Red Hat
There are signs that Red Hat's business should continue to perform well for quite some time. On the company's conference call, management noted that information technology spending is improving beyond the Web serving space and into the more traditional database and enterprise resource planning (ERP) environments. The company also noted that its sales cycles have shortened, it's receiving higher dollar amounts per transaction, and the businesses are scaling well operationally.
Surely, Red Hat has good products. And its partners, such as Hewlett-Packard
These are all great data points on the health of the business, but I'm most intrigued by the strong 45% growth in free cash flow that the company's subscription-based business model generated in the quarter. This growth means that the company has plenty of cash to invest in its business, remain competitive, and pursue new opportunities.
While I came around quite a while ago to the notion that Red Hat's business model was working, I remained skeptical that the stock was a good buy because of the company's tendency to increase share count and dilute existing shareholders. Looks as though I may have been overly cautious on this count. It's time to revisit my skepticism.
For investors, the current bogeyman is the valuation of Red Hat shares, because such amazing performance never comes cheap. It's hard to imagine paying 85 times earnings for Red Hat or for any other company. But with such a solid earnings performance, not to mention its somewhat strong balance sheet, I'll be adding Red Hat to the list of companies I keep close tabs on.
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