Is Red Hat Recession Proof?

Lofty oil prices. Sub-prime mortgages woes. Whispers of a potential recession ahead continue. That made me wonder: If the U.S. heads into a recession soon, are open source companies like Red Hat (RHT) better positioned to weather the storm than their closed source counterparts?

At first glance, Red Hat has the upper hand against its closed source counterparts (Unix, Microsoft (MSFT)) during economic slowdowns. Big businesses already are migrating their Unix-based systems to more cost-effective Linux servers. One could argue those migrations will accelerate if corporate technology budgets get cut. And for new projects, technology managers would likely look at open source first because of its initial (and potential long-term) cost advantages over closed-source alternatives.

In theory, Red Hat also wins on the employment front during difficult economic times. By leveraging a worldwide community of developers committed to the open source movement, Red Hat don't suffer from the big salary structures seen within Microsoft, Oracle (ORCL) and other traditional software providers.

While companies like Symantec (SYMC) continue to cut staff heading into 2008, nimble open source providers continue to recruit employees. So far, so good for open source companies like Red Hat.

But perhaps things aren't so cut-and-dry. When stocks tumbled in 2001, Red Hat shares fell far further than those of Microsoft and Oracle. Take a look at this chart tracking Microsoft, Oracle and Red Hat shares since 2000. Red Hat investors certainly didn't think the company was recession proof when shares fell from $95.12 in January 2000 to $7.10 in December 2001 (prices adjusted for splits). Of course, Red Hat shares were also suffering from irrational exuberance ahead of the downturn.

Still, I believe open source companies like Red Hat, MySQL and SugarCRM are in far better position -- during strong and weak economic times -- than their legacy software counterparts. After all, it's hard to bet against a global software movement where thousands of talented developers lend a hand to the effort … at little or no financial expense.

SurgarCRM has experienced record growth in recent months. And MySQL continues to monitor financial markets for an opportune time to launch a potential initial public offering. If MySQL finds the courage to go public during a soft economy -- or even a recession -- it will be the ultimate vote of confidence in the open source business model.

Full disclosure: I own a few Red Hat shares, but certainly not enough for me to kick back and relax during good — or bad — economic times.

Comments

[User 106344]

All I can say for RHT, is watch out for ORCL...