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Advantage: Red Hat

By Anders Bylund – Updated Apr 5, 2017 at 7:54PM

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The company exceeds expectations as IT departments seek better value.

Why am I not surprised to see Linux vendor Red Hat (NYSE:RHT) pull out a great quarter in the midst of a marketwide and worldwide panic? Let me explain.

Just the facts, man
Red Hat reported pro forma third-quarter earnings of $0.24 per diluted share, well above last year's $0.20 per share and handily beating analyst estimates. Sales grew 22% year over year to $165 million, which is slightly below analyst expectations; and $135 million of that figure comes from long-term license and support subscriptions. These results can stand back to back with rivals Oracle (NASDAQ:ORCL) and Big Blue IBM (NYSE:IBM).

How come?
Open source software like Red Hat Linux and its JBoss middleware platform are especially well suited for success in times of tight IT budgets. The software is cheap, and can often be had for free. It's the support contracts that cost money, and in that department, CIO Insight magazine has named Red Hat a top-10 value in the enterprise sector for four years running. With cost advantages and industrial accolades like those, it's easier to talk the executive team into an open-source platform test and then an outright production environment.

What do I do now?
So the worse the market gets, the better it is for low-cost software providers like Red Hat, Novell (NASDAQ:NOVL), and -- on a grander scale -- Adobe (NASDAQ:ADBE) or Google (NASDAQ:GOOG). Return on IT investments is the name of the game these days, and those are the companies that deliver top-dollar value on bottom-dollar cash commitments.

The market couldn't see this coming, and Red Hat's stock price spiked nearly 15% this morning. Bet on more skepticism in the coming quarters, and on Red Hat's ability to prove those fears unfounded. A skilled Fool can make lots of money on those highly predictable swings.

Further Foolishness:

Google is a Motley Fool Rule Breakers pick.

Fool contributor Anders Bylund owns shares in Google, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings or a bio if you like. The Motley Fool is investors writing for investors.

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