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Investors Mosaic is offering a "deep dive" into the numbers for Red Hat (RHT) that deserves more than a quick read.

It merits action.

The financial case is that recent downgrades are overdone, that they were caused by currency fluctuations. The Euro was weak, the dollar was strong, and if you take that out revenue growth is actually running at 20% year-over-year.

I'm going to take a more fundamental approach, based on years observing the company, and my attendance this summer at their annual Summit meeting in Boston.

Red Hat earnings are driven today by two products, Red Hat Enterprise Linux and JBOSS. The first you know, the second you may not know. JBOSS is middleware, the company was acquired back in 2006 and it underperformed for some time, in part because it had to be transformed for the Red Hat way of doing business.

That business is, in short, relationship marketing.

Red Hat sales are driven not by hard-charging salesmen but by software engineers building relationships deep inside client companies - and potential client companies. This is how you turn open source into money. Sure you can download the code, but without guidance open source code doesn't provide enormous value. Think of your first Red Hat license as an admission fee into an exclusive club, one that produces fire in a very cold world. Once a licensee goes inside the tent, Red Hat uses relationships to increase the "share of wallet" in that target's software purchasing. It works.

JBOSS represents the second stage in this booster rocket. Sure, Red Hat's KVM virtualization system lags badly behind market leader VMware's, but its relationship marketing approach has done at least as well in the middleware area than VMware has done with its Springsource unit. And once you're dependent on a company for middleware, you're going to stay with them - that stuff doesn't come out.

Finally we have the cloud. What you need to know about the cloud is that it's not a big business yet. Despite all the hype we've heard for many years now, the cloud is still Amazon (AMZN) and Google (GOOG) - along with a bunch of experiments.

By committing to OpenStack, which is no longer controlled by Rackspace (RAX), for its cloud infrastructure, Red Hat has a near-term loser that's a long-term winner. Hewlett-Packard (HPQ) and Dell (DELL) are just two of the major companies depending on OpenStack clouds to make them relevant again, because clouds built on open standards and open source are like the tortoise to the proprietary hare. They move slowly, but they move, and eventually (as in Linux) they can win.

That's the third stage of the rocket. Red Hat has its own Platform as a Service, or PaaS, offering, called OpenShift, which like OpenStack is open source. The name of the game now is to get software that's sold as a service running on this platform, and make it profitable. Profits can come from subscriptions by SaaS companies, but also from internal savings. And that process has just started.

The counter-argument is that VMware is winning on virtualization, so its competing Cloud Foundry should beat OpenShift. I disagree. The KBM route is the route favored by IBM (IBM), and by the open source community, and we're talking about two open source projects, each seeking developer help in order to mature. I think credibility counts here. But I acknowledge the counter-argument.

So you have a proven business model, a proven second product, and a third stage of growth that everyone's talking about. The cloud won't be a big growth driver for Red Hat, I think, until at least fiscal 2015. But that growth curve has a very nice trajectory, and a long one.

That's why I finally got me some Red Hat. You should, too.

Source: Why You Should Buy Red Hat Now