One good thing about a market collapse is that it exposes value in what had been speculation.
Take Red Hat (NYSE:RHT) for example. At its recent P/E of 78, this was a very speculative play, priced to perfection. The stock market's correction has it at a more reasonable P/E of 55.
Why be interested in Red Hat at all? Here are some reasons:
Red Hat is the dominant provider of enterprise Linux licenses. This is a server play, not a desktop play. Corporations that acquire operating systems like to have a throat they can choke, and will pay for one. That's proven.
Red Hat has outlasted its competitors in this field. Who are its competitors today? Novell (NASDAQ:NOVL), Canonical, a host of minor players, and Oracle (NYSE:ORCL). Yes, Oracle is Red Hat's main competition right now in licensed Linux. If you're not already an Oracle customer, are you interested in Oracle's Linux? I doubt it.
Clouds work. Red Hat's OpenShift now has serious allies with the Open Virtualization Alliance, which is backing the KVM hypervisor it uses. Don't like KVM? You can run Red Hat with VMWare too.
We usually think of clouds in terms of start-ups like Facebook, or in terms of cloud hosts like Amazon. But it's a low-cost enterprise platform that is of high value to any company that may demand immense on-demand computing power, only not all the time.
That's because clouds combine two of the industry's long-term trends, virtualization and distributed computing. This gives companies the benefits of both, under close control. One reason for all the volatility in the markets lately might be the increased use of cloud-based solutions by financial houses.
But anyone doing bursty applications likes clouds. Dreamworks Animation (NASDAQ:DWA), for instance. They can use clouds to simulate desktop response on supercomputing tasks, like analyzing and drawing-in scenes for movies. So can drug makers, and anyone involved in high-end research. That's a lot of business.
What makes for step-changes in computing is when a technology emerges that can dramatically lower costs, or increase capabilities. Well-managed clouds do both, and their profitable use has been demonstrated enough times to convince enterprises that this is the future.
No one is in a better position to take advantage of this realization than Red Hat. What Apple is doing on the client, destroying competitors and grabbing market share in huge hunks, clouds are now starting to do in the enterprise space.
And no one is better positioned to take advantage of that than Red Hat, because private clouds under close organizational control is the way managements want to seize the opportunity.
The recent fall in stock prices was not the end of the world. The bearishness of big analysts right now is a unique buying opportunity, a chance for you to get in on fast-growing sectors of the economy at a bargain price.
The louder bears call for throwing everything away, the better Red Hat looks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.