Most analysts see Red Hat (NYSE:RHT) as an open source company, or perhaps a cloud software play.
In fact, it's a services company, CEO Jim Whitehurst told me recently. A growing understanding of that fact has recently sent the stock on a tear, helping it recover half the ground it lost early this year. The stock currently trades at around $55/share.
Whether the company is buying a project like Ceph or merely supporting someone else's project like Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Kubernetes containers, its aim remains the same, to support the software and help drive its road map on behalf of its customers.
All this is built on a platform of Red Hat Enterprise Linux RHEL. "Everyone talks about Heartbleed," the flaw in SSL certificates discovered in early April. "If you're a RHEL subscriber, you knew about this in 4 hours and got your systems patched. That's part of having RHEL. That's the reason you pay for free software, that degree of security, that response."
While the whole point of cloud virtualization is that you can write a program under any operating system and run it on the same infrastructure, Red Hat uses RHEL certification to assure cloud compatibility. "If it is RHEL-certified you'll get our support and that of your ISV, regardless of what cloud it runs on."
Cloud platforms from Google, Amazon.com (NASDAQ:AMZN), VMware (NYSE:VMW) and the OpenStack players like IBM Corp. (NYSE:IBM) and HP (NYSE:HPQ) are not yet fully compatible; Red Hat makes certain anything written with its Linux will run on any platform, and has worked on other projects to ease deployment, like Delta Cloud.
"If you can write to Delta Cloud it should run on Amazon, VMware and OpenStack." Red Hat also bought into a company called ManageIQ, offering cloud management, and rebranded it as an open source product called CloudForms.
Certification, containerization and careful management, including regular software updates, can do as much to maintain security as anything else, Whitehurst said. Cloud is becoming the IT infrastructure of choice, and all the professionalism of the old IT industries is essential in any deployment.
Red Hat has grown its top line 69% since 2011, usually bringing about 12% of that to the net income line. The most recent quarter, ending in May, showed the same pattern on a year-over-year basis. The numbers are not yet big enough to give a boost to a giant company like IBM, which has been a key ally for over a decade, but that time is coming.
When it does, however, expect a fight. Any company involved in OpenStack deployments will want to have a world-class software services organization bolted on to it at some point. If IBM does make a play, expect a response from Dell or Hewlett-Packard, and an exciting takeover battle that will make some investors a lot of money.
Meanwhile, you have solid growth and a stable franchise in the cloud, something very few companies can match. That is why Red Hat sells at a Price/Earnings multiple near 60, and will be a bargain in the event of a cloud market correction.
Disclosure: The author is long GOOG, GOOGL, AMZN. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.