Red Hat: Grasping The Open Source Software Concept

The Stalwart submits: My impression is that investors don't yet understand the open source software industry, or how to think of an open source software company, like Red Hat (RHT). You can see, just by looking at the nosebleed valuations on a company like Red Hat, that investors think the company is the "Microsoft (MSFT) of Linux," which it really isn't.

See, it's not really a software company, in that its margins (should it mature) won't resemble what people are used to with companies like Microsoft and Oracle (ORCL). That's because it doesn't really sell software, it sells services on software.

That's not a matter of semantics, because selling services is not similarly lucrative. That doesn't mean it won't eventually make a lot of money -- maybe it will, maybe it won't -- but for every dollar it takes in revenue, less will drop to the bottom line than for other companies that you'd call software companies.

For an interesting analysis of the state of play, here's an interesting piece from Computerworld.

RHT 1-yr chart:

Comments

[five whys]

Agree with your comments about difference bet'n "software" company v/s "service" company.

I feel though that RHT's valuation simply reflects the growth it has been seeing and cash on hand.. if you look at enterprise value / EBIT, the valuation doesnt seem outrageous for a company thats grown 4 times in 4 years ($93M in 2003 to >$400M in trailing 12 months per my Morningstar screen).