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Current fears of Red Hat's (RHT) move into new areas of software, as well as competition from Oracle (ORCL) Linux, are holding the stock back, undermining its value. However, while Oracle had claimed to beat out Red Hat since last October, so far they have not done so. There has been no real major expansion of Oracle Linux, while Red Hat has survived competition and displayed growth.

415 Group analyst Raven Zachery commented on Oracle saying, "We haven't seen any announcements about customer wins. That's very telling."

Research from Reuters

  • News from major software companies are skeptic of whether products designed to run on Red Hat Linux will also run on Oracle Linux: "Oracle's Linux is not certified. It's not tested," says Mark Murphy, an analyst with First Albany Capital. "It might be buggy. There's just no telling how horrible this Oracle offering could be."
  • The fear of Oracle's Linux launch whose major customers include Amazon.com (AMZN), Merrill Lynch (MER), DreamWorks and Goodyear (GT) has failed to show any signs of worry for Red Hat. "Anybody that expected Oracle to start sticking it to Red Hat right away doesn't understand the time it takes to actually introduce a product," said Cowen & Co. analyst Peter Goldmacher.
  • "I don't see (Oracle Linux) becoming a volume business in the near term or threatening Red Hat," says Stephen O'Grady, a software industry analyst with market researcher RedMonk. Red Hat reported that it added more than 12,000 new customers in its most-recent quarter.
  • IBM (IBM) and SAP (SAP) have not extended their Red Hat certification to Oracle Linux; Oracle is not showing growing customer base.
  • Oracle's website displays a catch phrase "Customers of all sizes across a variety of industries are embracing Oracle Unbreakable Linux," following with a list of 7 IT executives. However, when Reuters attempted to contact all seven, five responded, but only one company, IHOP, admitted to using Oracle Linux. The others were using other products, including Red Hat.
  • Reasons to be Bullish

  • Sales strength in Japan, Europe and in the U.S
  • Checks show strong sales growth world wide
  • Novell (NOVL) recently reported 300% y/y increase in SLES invoices, no slowdown in enterprise Linux
  • Services will add to bottom line, strong sales channel + support
  • Valuation is conservative
  • Overall open source adoption remains strong, and Red Hat has strong branding over the competition
  • Monitization opportunities in the forseeable future are positive- plans to open a Web store to boost sales will be a large plus
  • Strong fiscal 3Q07 results and positive 4q07 outlook.
  • Recent 2007 EPS upgrades
  • Oracle's attempt to move into the Linux space and Microsoft's (MSFT) decision to further involve in Linux both display strong growth in open-source solutions
  • Red Hat displaying rapid growth- GS Revised EPS for FY2007 $0.53
  • 3Q07 results - revenue increased 44.7% year-over-year to $105.8 million driven by strong demand for Enterprise Linux. Subscription revenue increased 47.5% year-over-year to $88.9 million with the addition of 12,000 new customers. Services revenue increased 31.5% to $17.0 million. Non-GAAP operating margin increased to 20.3% in the third quarter up from 16.9% in the second quarter.
  • Businesses are continuing to invest in Linux as a cheaper and more efficient solution to Windows products.
  • Accumulated deferred tax asset of $182.6 million as of February 2006 which can be used to offset taxes against future earnings.
  • Rapidly growing internet businesses and ecommerce businesses will drive demand for software apps and systems
  • Product roll out- Red Hat Enterprise Linux 5, which will include partnership with virtualization technology company VMware (virtualization being a key market in business enterprise, and VMware a leader)
  • Limited impact of Oracle Linux and Microsoft/Novell, and has been holding off on discounts, maintaining pricing.
  • Upcoming events

  • Red Hat could be announcing a Web store to boost sales next week
  • Will be attending Wall Street analysts and journalists to a gathering on March 14 in San Francisco on its new OS and company's strategic direction.
  • 4Q07 report March 29th
  • Chart Analysis: 2 year Chart of Red Hat

    rht.png_

  • Chart pattern indicates upward trend
  • Neutral relative strength
  • rising 50 day MA: 50 day MA crossing steadily over the 200 day MA, showing possible turn-around
  • broke downtrend line and maintaining above first support line
  • up/down volume direction is up: ratio 1.6
  • resistance around 23.83 - likely to see a double top
  • Disclosure: Author has no position in RHT

    Source: Red Hat: Surviving Competition, Displaying Growth