Red Hat Stock Climbing Back

| About: Red Hat, (RHT)

Red Hat (RHAT) shares have come scratching back from their worst levels following the twin announcements that Oracle (NASDAQ:ORCL) plans to offer maintenance service to Red Hat Linux users while Microsoft (NASDAQ:MSFT) has teamed up with Novell (NASDAQ:NOVL) to offer ways for companies to run both Windows and Novell’s Suse Linux on the same boxes. Nonetheless, serious concerns remain about how those developments will impact Red Hat’s business in the long run. And those concerns are going to weight on Red Hat shares.

Analysts are still sorting out the ramifications.

Brent Thill, an analyst with Citigroup, issued a report Monday called “Shifting Tectonic Plates of the Linux Market,” which concludes that Red Hat’s fundamentals “are likely to deteriorate considering the new price war initiated by ORCL and MSFT’s budding relationship [with] NOVL. ”

I liked this line in his report: “Long-term impact uncertain but intermediate-term causes uncertainty.” Less confusingly, he writes that “customers have more questions about future Linux deployments than they had prior to the announcements being made.” He expects a “chilling effect” on overall Linux adoption for at least a period of months while customers work out which Linux version to use, what to pay for it, and which companies will provide support. In nothing else, it is almost certainly going to pressure pricing on Linux support. Thill notes that Gartner is recommending that clients seek a 50% discount from existing prices for renewals and new deployments due to the Oracle’s entrance into the market as a viable alternative.

Brad Reback, an analyst with CIBC World Markets, asserted in a report Monday morning that the long-term impact of both the Microsoft/Novell alliance the Oracle “Unbreakable Linux” announcement will be “far less than most fear,” and he asserts that they could actually drive Linux adoption over the long haul. That said, Reback trimmed his estimates for revenue, profits and cash flow for Red Hat to reflect renewal rate pressures, higher operating costs and other factors. He trimmed his fiscal 2008 EPS forecast to 55 cents a share, from 64 cents. (He remains at 45 cents for fiscal 2007.) His revenue forecasts drop to $399.8 million from $404 million for fiscal 2007, and to $588.8 million from $548.3 million for fiscal 2008.

Red Hat shares fell 32 cents, to $17.53, on Monday.