Please ensure Javascript is enabled for purposes of website accessibility

You Should Have Seen Red Hat's Success Coming

By Anders Bylund – Updated Apr 6, 2017 at 12:54AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Red Hat is still the tech horse you want to bet on.

I hate to say "I told you so," but ... I did tell you so.

Way back in March, I declared that Linux vendor Red Hat (NYSE:RHT) was the tech horse to bet on. The horse on which to bet. Whatever! (Relax -- today is National Punctuation Day, with Grammar Day nearly six months away.)

And the reasoning behind my pick was simple: Red Hat's products and services are cost-effective when compared to the competition from IBM (NYSE:IBM), Microsoft (NASDAQ:MSFT), and Oracle (NASDAQ:ORCL). That makes Red Hat the logical choice for many IT managers these days, from small business to large enterprise.

Note that I said "cost-effective." Red Hat Linux and the JBOSS application platform are more than just "cheap." Linux has grown up from a Finnish college student's hacking project to a full-feathered penguin with the power to run embedded systems, consumer desktops, and mission-critical business systems alike. And while the software itself is free or cheap, Red Hat is proving beyond reasonable doubt that world-class support services can bring in serious sales -- and profits.

The proof, as always, is in the pudding:

 

Q2 2008

Q2 2009

Change

Revenue

$164.4 million

$183.6 million

12%

Subscription Revenue

$135.7 million

$156.3 million

15%

GAAP Net Income

$21.1 million

$28.9 million

37%

Operating Cash Flow

$54.3 million

$63.0 million

14%

This growth is all the more impressive because it comes at a time when Microsoft's sales are swooning and even exploding-growth expert Google (NASDAQ:GOOG) barely grows. Red Hat's shareholders were instantly rewarded with a 13% overnight pop in the share price.

The growth drivers are exactly what I expected. CEO Jim Whitehurst noted that "IT organizations continue to move ahead with purchases of high value solutions, and Red Hat is capitalizing on this demand as a result of our strong customer relationships and proven value proposition." And CFO Charlie Peters said that Red Hat converted an unnamed "large technology company" from free software to paid support subscription: "This customer has attempted to support the software themselves but realized that they were incurring significant costs and risks to do so." In other words, the unknown customer is happy to use Linux, but sees real value in Red Hat's support.

And all this success has not gone unnoticed by Wall Street. The S&P 500 has seen a nice 30% gain over the past six months, and tech giants like Google and Microsoft have beaten that benchmark. But Red Hat puts them all to shame with an eye-popping 85% gain since my act of betting guidance. Zoom out to a three-year time scale and the story is the same: Red Hat has taken off, and I don't think it's landing anytime soon.

Stock up on amazing tech stocks along with Tim Beyers.

Google is a Motley Fool Rule Breakers selection, and Microsoft is a Motley Fool Inside Value pick. Try any of our Foolish newsletters today, free for 30 days.

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 concise bio if you like, and The Motley Fool is investors writing for investors.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Red Hat, Inc. Stock Quote
Red Hat, Inc.
RHT
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$237.92 (-1.27%) $-3.06
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$98.74 (-1.40%) $-1.40
International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$122.71 (-2.08%) $-2.60
Oracle Corporation Stock Quote
Oracle Corporation
ORCL
$64.55 (-2.24%) $-1.48

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.