There are many fronts in the technology wars. Hardware and software are only two broad categories. What rarely makes the news is the "other" guys. The designers and programmers that use other platforms, usually open source, like Linux. There are some solid companies operating in the Linux sphere and giving Microsoft and Apple a run for their money. One such company is RedHat (NYSE:RHT). RedHat markets proprietary business solutions and operating systems for desk tops, servers and more.
Fundamentally RedHat is a sound stock. It is overvalued at 57 times earnings but 99% institutional ownership could explain that. The company has great cash flow, increasing sales and no debt. Competitor Microsoft (NASDAQ:MSFT), while more reasonably valued at 11 times earnings, only has 64% institutional ownership and carries some debt. Revenue for RedHat increased about 25% in the period ending November 30, 2011 on increased subscriptions and training services. Year to date sales were up 26% at that time. This gain in sales resulted in a 46% increase in profit per share for the quarter and the year. Cash flows from operations increased over 40% as well, but were impacted negatively by losses in investment activities. Total cash flow declined for the year but remains strong. The financial strength of this company is easy to see. Standard and Poor's raised RedHat's corporate credit rating in December. The statement cited recurring revenue and consistent earnings growth.
The stock,which had been trending up since late in 2008, spent 2011 consolidating around $40. Bullish momentum is strong on the long term charts and suggests a further move upward. Short term the stock will continue to consolidate while global growth remains in question. Fears of slowing growth China and looming losses in Europe are keeping the US markets in check. I expect to see RedHat build support around $40 and then move upward again. The company has a history of beating earnings estimates and giving positive guidance.
Google (NASDAQ:GOOG) is another company profiting from Linux and competing with Microsoft and Apple (NASDAQ:AAPL) operating systems. Google's Android system is being used in phones, pads and e-readers. Total sales of smart phones in Q3 2011 are estimated to be about 115 million units, 26% of mobile device sales. Android phones are estimated to make up more than half of all smart phone sales.
Google is currently trading around $580, roughly 18 times earnings. And has high institutional/insider ownership, over 80%. Earnings, while good, have been disapointing and are not really expected to change much in 2012. The most recent report, released last week, sent the companies shares tumbling by 9%. Google is on the way down, perhaps as low as $475. The market is choppy in this stock and risky for a small account like mine.
Apple is proving to be a continuous challenge to RHT, GOOG and others. Apple's Mac OS is one of the easiest to use and most well known systems on the market. Third quarter results were good but not quite what analysts were estimating. An increase in sales and profit of over 50% was driven by international sales and left the pundits wanting more. Apple is scheduled to release fiscal 2012 first quarter results tomorrow after the bell and may well deliver. Apple is fairly valued now with a p/e around 15. The stock currently trades around $420, has good institutional ownership, close to 70%, and no debt.
Apple has been moving up strongly since the market lows a few years ago. Momentum remains bullish but the long term charts show waning demand for the stock. In the short term the stock looks as choppy as Google. Volume has been in decline since the stock first made its all time high around $425. AAPL is currently trading at that level but a move down to $375 looks probable. Momentum is turning bearish but the earnings news may trump all.
Microsoft is looking strong on the charts. MSFT released Q2 earnings for fiscal 2012 last week and surpassed expectations. The record quarterly revenue is up 5% from the previous year on strong demand for business services. Online services and entertainment/devices were both performance leaders for Microsoft in the quarter. Microsoft is undervalued with a forward looking p/e of 11. Proven strength in earnings, low debt, 75% institutional and insider ownership and a dividend yield of 2.69% make Microsoft very attractive. Thirty six analyst agree with at least a hold rating.
Microsoft has been trading sideways since reaching a post recession high near $31.50. The stock spent most of 2011 range bound below $27.50. The stock is now trading around $29.75 after breaking above resistance on its record revenue report. The momentum is bullish and increasing but volume isn't in the move yet. When the market gets behind Microsoft it will go to $37.50.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.