Red Hat (RHT), which I followed for six years at ZDNet (but don't own), is one of the great mysteries of the tech world. It's not based in California, but in Raleigh, NC. (There were rumors last year it was moving to Atlanta, but those rumors proved unfounded.)
Red Hat is not exciting. It sells operating systems and tools used on servers, and generally ignores the consumer market. Its product is not unique. Its Linux is open source, and you can get similar Linuxes from many places for the cost of a three-minute download. Red Hat also doesn't have a lot of fanboys in the media. Most reporters couldn't pick CEO Jim Whitehurst out of a lineup.
But Red Hat's stock is up over 800% in the last decade. That's better than Microsoft (MSFT), IBM, Oracle (ORCL) and Hewlett Packard (HPQ); narrow your time horizon down to five years and it's better than Google (GOOG). Its current price-earnings multiple is 77, nearly four times Google's.
So what's holding it up? Two things:
Red Hat has a business model it executes on. Say what you want about open source support subscriptions, Red Hat makes it work. Red Hat is the dominant enterprise Linux, its customers renew their licenses like clockwork. There is “there” there.
Red Hat makes big bets: The company paid up for JBOSS in 2006. At $350 million, it was one of the biggest deals of the open source era. But the bet, in time, paid off. And now it's betting very heavily on clouds.
Steady profits, and a willingness to roll the dice, get respect on Wall Street. If you've got a good base of profits and a good story about tomorrow, people will throw money at you.
How good is Red Hat's bet on the cloud? The bet is big enough that CNN routinely calls Red Hat “a cloud computing firm.” But it's really bigger than that.
OpenShift, the company's platform as a service (PaaS) offering, has more people working on it than any other Red Hat product, and is in direct competition with platforms from VMWare (VMW) and Microsoft. It supports many operating systems and frameworks, not just those that Red Hat makes, and it has a clear development roadmap.
Investors are betting OpenShift will succeed, and that its success will make it a great acquisition target at a premium to its current price. HP, IBM, Oracle and Microsoft would all find an $8 billion acquisition to be bite-sized, and even a premium over that to be sofa cushion money. That hope, so far unrealized, keeps Red Hat's price floating in the clouds.
I think it's a vain hope. A corporate giant buying Red Hat would probably lose its management, its message discipline and (in time) its market. One of Red Hat's key advantages is that, because it is relatively small, it doesn't play the “great game” of the giants.
So value Red Hat based on its execution, its products, and its ability to make its business model work. Value it for its management and buy only if you think all those things are worth the price.